Brexit and the UK Economy

Table of Contents

The UK is one of the biggest economies in the world with an annual GDP of 2.83 trillion dollars and a population of over 66 million. The country’s economy has been in the ups and downs since the Brexit referendum in 2016. In this article, we will review how Brexit has affected the UK economy. We will also talk about pounds short and long term trading strategies Let’s first start with a background of Brexit.

 

Brexit Background

On 1 January 1973, Britain formally joined the European Union. The initial idea was to reduce the trade restrictions between the member states. In 1997 the EU elected to use the single currency Euro. However, Britain decided otherwise and continued using the British Pound. The political parties in Britain had always been divided on joining the EU. The Labour Party first campaigned to leave the European commission in 1983. But after a heavy defeat in the election, the party changed its policy. Meanwhile, the political division continued throughout this time. In 2016, the then prime minister David Cameron decided to hold a referendum. The people were asked whether to remain or leave the EU.

The referendum resulted in 52% of voters favoring to leave the EU. It finally paved the way for Britain’s withdrawal from the EU. The term Brexit now refers to Britain’s exit from the EU.

Following the referendum, a formal but complicated process of leaving the EU started in 2017. The process continued for the next 2 years and was completed on 31 December 2019.  Currently, the UK and EU are in a transition period that will end on 31 December 2020. The period is primarily for the UK and EU negotiations on their future trade relations. During this transition period, the existing EU rules on travel, trade, and business continue to apply.


 

Brexit Effects on the British Political System

BREXIT was a daunting dilemma that resulted in an upheaval in the British political system. Prime Minister David Cameron, a pro-EU leader had initiated the referendum. The referendum result was a setback to him and lead to his resignation from the premiership.

Theresa May took on the premiership in the aftermath of Cameron’s resignation. She campaigned for a Brexit deal in the parliament. However, she struggled to persuade the parliament and resigned after almost 2 years in office.

Yet another resignation lead the Conservative party to appoint Boris Johnson as their prime ministerial candidate. He won the parliament vote but things were not smooth for Boris Johnson either. The conservative party members refused his Brexit deal. Finding no way out, Boris Johnson called for a fresh election. This time he managed to win a majority in the parliament. The majority government paved the way for the UK’s withdrawal from the European Union on 31 December 2019.

Now the UK has formally withdrawn from the European Union. A year-long transition period has started which is due to complete until 31 December 2020. In this transition period, the UK and EU are finalizing their cooperation in an orderly manner. Although it was still possible to mutually extend the transition period the UK government has gone ahead with the deadline.

 

Brexit Effects on the British Economy

The Brexit impact on the UK’s economy has been the real cause of concern. The majority of the analysts believe that the UK’s per capita income is likely to drop. A study conducted earlier in 2017 showed that inflation rose by 1.7% amid the uncertainty over Brexit. Another study conducted in 2018 shows that the economic cost of Brexit has been 2% of the UK’s GDP.

Stanford university analysis currently suggests that local and international business has reduced their investment by 6% since the referendum. Several other studies have also indicated a negative impact on the UK’s international trade. The manufacturing sector is also likely to get the hit which in turn is expected to raise unemployment. However, economists believe that a better trade deal with the EU can help the UK economy.

 

The British Pound and the Brexit

The last 4 and half years have been a troubled period for the British pound. The pound was trading around $1.45 against the US dollar before the 2016 referendum. However, as with the majority of the Brits decided to leave the EU, the pound tumbled to almost $1.30. The decline continued throughout 2016 and only found some support near $1.20.

 

In the second half of 2017, the pound stabilized for some time. This was due to the speculations on a Brexit delay and a possible second referendum. A slight recovery also followed in 2018 and it once again touched the pre-Brexit level of 1.40. However, amid the political uncertainty, the uptrend did not last long and followed yet another decline.

The pound also remained under pressure in 2019. The UK completed the official withdrawal on 31 December the pound ended the year at 1.3260.

Since then the pound’s trading range is between 1.1400 and 1.3540. The lowest mark (1.1409) was in March 2020 following the Coronavirus outbreak. At the moment both Brexit and Coronavirus are putting pressure on the UK’s economy and the pound’s value. It’s been nearly 11 months since the coronavirus outbreak. The analysts believe that if the situation continues it is likely to further negatively impact the UK’s economy.

Pound Trading Strategy against the US dollar

As of 12th November 2020, the pound has gained some strength and trading higher. It crossed the psychological barrier of 1.3000 and is currently trading near 1.3200. The rise is mainly attributed to the weakness in the US dollar. The US dollar index dropped to almost 92.20 during the US elections. The dollar is still keeping under pressure as President Trump is challenging the vote count in the US Supreme Court.

The pound is likely to continue benefiting from the situation in the coming days.  A further weakness in the US dollar is expected to send the pair near 1.3500. The

 

Short Term Trading Strategy

On an intraday basis, traders may opt to buy the GB/USD on small dips. A decent entry-level for this week would be near 1.3180. The ideal take profit would be at or near 1.3300. The stop-loss must remain present slightly below the 1.3100 level.

A weekly closing below 1.3080 would suggest a temporary correction towards 1.2920. The pair would be an ideal buy once again upon this correction. The target for multi-day traders would be 1.3170. While the intraday traders can target 70 to 80 pips.

Note: A weekly closing anytime below 1.2840 would be an indication of a permanent trend reversal. The traders would need to adjust accordingly.

 

Long Term Trading Strategy

The long trading strategy remains a risky business amid the ongoing coronavirus pandemic and Brexit transition period. The US elections are also playing an important role in forming a long term GBP/USD trading strategy. A further uncertainty on Trump conceding the US elections would favor buying the pair near 1.3200. The target would be 1.35000.

However, as the coronavirus vaccine rollout is making the headlines, a slight recovery in the US dollar can also halt the GBP/USD advancement. In such an event the pair would be ideal to sell between 1.3420 and 1.35000. The multi-week target for this trade would be 1.3000.

The targets can be further extended based on the US dollar performance. At the same time, traders also must look for the positives in the UK economy. It can be a better trade deal with the EU or even an improvement in the Coronavirus situation. Visit site

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