Forex has been subject to a turbulent and unpredictable year, with back to back political events having significant effects on global economies. Currencies, therefore, have seen large swings in value, and this trend looks set to continue in 2017. With the announcement of a snap general election in the UK, as well as the looming exit from the EU in 2019, this article will look at some of the effects on forex markets.
Value of the Pound
The referendum results in June 2016 over EU membership came as a shock to many British people as well as the global community, as did the announcement of a snap general election. Both had the opposite effect on the value of the pound.
The immediate aftermath of the referendum saw the pound’s value plummet 7% against the euro, reaching a 31 year low. This was because Brexit was forecasted to have dire consequences on the UK economy. The election, on the other hand, saw the pound’s value soar, as a result of confidence in the Conservatives’ likelihood to win.
These value swings, however, have led to investment uncertainty in the UK forex market. Although some investors thrive on large fluctuations in currency, the level of unpredictability these events have caused has made it very difficult to predict how the pound will fare in the future.
Even if the Conservatives win the election, the promise of Brexit throws up more doubts than certainties, and investors are uncertain as to how the market will behave post Brexit. With more volatility added to an already volatile market, investments in the pound are now far riskier, although potentially more rewarding if they are successful.
With a significant amount of uncertainty over the future of the British economy, a precedent has been set for caution when trading. Those attracted to riskier trades are in luck when purchasing pounds, as the currency could be set to experience even more volatility in the future as both events unfold.
This could lead to less overall interest in the pound for now, as investors wait to see how the situation plays out. The results of the general election could well influence the levels of volatility which will be present, as the winning party will negotiate the exact terms of Brexit.
Neither Has Happened Yet
The effects which have already happened as a result of Brexit and the general election announcement are really only temporary hints as to what might happen in the future. Now that the forex market has had time to prepare for political and economic shocks, it could be the case that neither event will have a significant influence.
Any predictions before the events are guesswork, as no one can know for certain who will be elected or what the terms of Brexit will be. Therefore, each event influences the other, and neither has any foregone conclusions.
Brexit and the upcoming election have certainly had immediate effects on the forex market, especially with regards to the pound, but none have been long lasting. Therefore, it remains to be seen whether the forex market will be susceptible to further changes, or will continue as normal after these events.