How ‘Brexit’ Would Affect the Forex Market

There has been growing speculation that Britain may be considering an exit from the European Union. Also known simply as a “Brexit”, there is a considerable amount of speculation in regards to the ramifications that such a move would cause. Although much focus has been placed upon political and economic changes, we also need to keep in mind that a Brexit may significantly affect the world of Forex trading.

Potentially Massive Hedging

Much like during uncertain economic times, we would likely see a good deal of hedging against both the euro and the pound. Some analysts feel that the pound itself may (temporarily) drop in value; leading to a selling off when any Brexit rumours become more substantiated. However, there are others who believe that the actual value will change little. It is still likely that many Forex traders will adopt a watch-and-wait approach as opposed to taking a more proactive stance.

Knee-Jerk Currency Fluctuations

If the Brexit does indeed come to pass, the chances are high that major currencies around the world will see dramatic changes in their value within short periods of time. The yen and the dollar would naturally be included within this category. This could very well prove to be beneficial for Forex day traders who are looking to capitalise on such volatility. From this perspective, the entire volume of the Forex markets is predicted to substantially increase.

A Confidence Issue?

Most currency investors are understandably concerned about how the long-term value of the pound will fare. Some economists feel that a lack of confidence in regards to a British economy with less ties to Europe could cause the pound to fall. Although it may experience a significant depreciation before, during and immediately after the Brexit, it is not likely that any permanent damage will be done. As the pound would no longer be as innately tied to the economic conditions of the European Union, it is not unreasonable to surmise that it could experience a return to strengths not seen since before the global economic crisis. Once again, this could prove to be quite attractive to active Forex traders of all levels.

Regulatory Issues

It is also important to look at potential regulatory changes throughout the Forex markets. Currently, many platforms based out of the United Kingdom can be accessed by European traders. It is still unclear if a Brexit would permanently change this unique relationship. This could have profound impacts upon firms which are currently located in Britain. Transparency and data protection laws may change while some companies might not be able to cater to the needs of specific geographic locations. Still, this is likely to be a worst-case scenario more than anything else.

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