A ‘no-deal’ Brexit is unlikely to happen, which means the pound will get stronger against the dollar. There is uncertainty around UK Prime Minister Teresa May's position. But there are several factors that mean no deal — the UK leaving the EU on 29 March 2019 with no mutually agreed agreement in place — remains an improbable outcome.
Traders should be looking to trade GBPUSD to take the opportunity of the pound’s forecasted strength.
How can the pound get stronger against the dollar?
Like any special offer, currencies can be ‘bargains’ sometimes. The pound appears to be a great bargain at the moment.
The uncertainty around Brexit means sterling is more undervalued than economic fundamentals would suggest. Italian lender Unicredit estimates GBPUSD would be trading nearer 1.40, if not for the fear of an uncertain outcome weighing it down. Having said that, sentiment now points to the probability of a ‘no-deal’ Brexit as being extremely low.
If no agreement is reached, it will result in a “hard border” between Northern Ireland (part of the UK) and Ireland, with potential customs and immigration controls. A hard border would raise the real possibility of renewed violence in Northern Ireland, and constitutes an unacceptable national security risk for the UK.
The UK parliament also has a much greater say in the final deal between the UK and the EU. An amendment to UK Prime Minister’s Theresa May’s proposal means that MPs may well have the power to prevent a “no deal” — and possibly result in a “Norway-style” Brexit instead.
The very low probability of a ‘no-deal’ Brexit has probably not been adequately reflected in the pound’s value, due to short-term political uncertainty. This means the currency has scope for appreciation. We see a strong probability of the pound’s value rising quickly as 'no-deal’ risk evaporates and the markets realise just how undervalued it really is.
USD: the perfect partner?
Buying GBPUSD is probably the best way to trade the expected appreciation in the pound.
The US Dollar is widely expected to weaken in 2019. The US economy will likely peak next year, and then begin to decline. This makes it the ideal match for a rising pound. The USD may also be dragged down by a possible China-US trade war, and fears the US government could hit its debt-ceiling amidst a now-divided Congress.
Some recent estimates suggest GBPUSD should be at 1.30 based on economic fundamentals alone – when it is in fact only at 1.27. This makes the pound 3 cents cheaper than it ought to be.
If you believe that there will be a relatively benign Brexit and the US Dollar will fall, then GBPUSD is set to rally strongly. The pair is currently trading on a ‘hard floor’ from which it has repeatedly bounced, and the expectation is that it will bounce again.
How high can GBP bounce?
If the Brexit risk is lifted, GBPUSD should rally back to around June 2016 levels of 1.35-1.36 — before the UK referendum on leaving the EU. Assuming a weaker dollar, it could go even higher.
A Stop Loss placed under the key 1.27 ‘hard floor’ makes for a low-risk, high-reward trade. We advocate cautious entry points at a range of 1.28 to 1.30. Exness will keep our finger on the pulse as Brexit unfolds. If trading conditions hit optimum, we'll be ready to inform you.
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Step 4: making a trade
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As a professional trader, selecting the right pair requires some research. For a first-time test, any pair will be sufficient. Drag a pair from the list of currencies on the left side of the trading terminal. The old saying goes, “what goes up, must come down.” Obviously, this principle goes the other way too. Your mission is to find a moment when the price direction is going to swing or reverse. If you feel the price is about to go up (bullish), then BUY, if it looks like it’s been trading high and the price has started a downward (bearish) trend, then SELL.
There are many ways to open your trade. You can select from the buy and sell options on the top left of the chart. Preferably, double-click the currency pair on the list. Right click on the chart when you’re ready to make your first trade. Time to set the volume depending on how confident you are in the direction you are forecasting. This is the perfect time to set your stop loss and take profit. Click the arrow to the right of the stop loss and take profit prices.
Note how the blue and dark red lines in the popup graph sit above and below the buy(ask) and sell(bid) price. In the example, we traded long (buy) and got a message confirming the order was successful. If you get an error, your volume was too high for your balance, or your stop loss/take profit was too close to the spread. Remember, every order starts as a negative because of the spread. Be patient. Your take profit will activate when the time is right, and your stop loss is protecting you. To close an order, you have three options. Click the X on the right or right-click the order. If you double click the order, you can close or modify the order.
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