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Brexit is a nightmare for currency traders

Trying to get a handle on where the British pound is headed? Good luck with that.UK lawmakers are wid...

Posted: Jan 15, 2019 4:55 PM
Updated: Jan 15, 2019 4:55 PM

Trying to get a handle on where the British pound is headed? Good luck with that.

UK lawmakers are widely expected to reject the divorce deal with the European Union negotiated by Prime Minister Theresa May on Tuesday. The only real question is the margin of the loss.

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Jochen Stanzl, an analyst at CMC Markets, said the pound could weaken in the immediate aftermath of a defeat to $1.24. The currency dipped 1% ahead of the vote to near $1.27.

Money transfer company TransferWise said it would limit users to moving £10,000 ($12,840) in or out of the United Kingdom on Tuesday because of the "higher likelihood of exchange rate volatility."

Yet there is a "silver lining" for the pound, according to Societe Generale strategist Kit Juckes. A defeat for May increases the chances that Brexit will eventually be delayed, or called off altogether.

What will happen in the days after the vote is very difficult to predict.

"All hell could break loose as the various factions of parliament struggle to gain control of the Brexit process," said Kallum Pickering, a senior economist at Berenberg. "We are probably about to enter the phase of peak uncertainty."

Britain is scheduled to leave the European Union at the end of March, and it's unlikely that the deal negotiated by May can be substantially revised before that deadline.

Potential alternatives include crashing out of the bloc without a deal, a second referendum or the collapse of May's government and a general election. There is increasing speculation that the whole process will be delayed.

The wide range of potential outcomes, and the seriousness of their consequences, presents a major challenge to currency traders.

"It's really hard to say upfront what the main scenario will be," said Stanzl. "It's really difficult to say 'go long on the pound' or 'go short on the pound,' because everything is on the table, everything is possible."

Analysts said that Wednesday, the day after the Brexit vote, will be crucial for the pound.

If a huge number of lawmakers vote against May, the opposition Labour Party could try to force a general election or she could resign as prime minister.

May has survived revolts in the past, however. If she hangs on, her next step is to produce an alternative deal within three days. Still, it's not clear that any one plan can gain the required support in parliament.

If progress is not made soon, the chances of the most extreme scenarios — or a delay — increase.

"No Brexit seems more likely ... than a no-deal Brexit," said Juckes. "That isn't bad for the currency, but uncertainty levels won't be reduced by magic tomorrow."

Capital Economics predicts that the pound would rally to $1.45 by the end of 2020 if May's deal is approved. A Brexit fudge or delay would cause the currency to strengthen to $1.40 by the same date.

Crashing out of the European Union would send it plummeting to $1.12.

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