The Pound’s strength and Gold’s price are dependent on Brexit’s outcome. With the 31 October deadline approaching and assuming no extension is offered, UK is faced with three possible scenarios. How should investors trade?
Over the weekend, we ran a roundtable discussion with five of our experts – Head of Forex Kenneth Tan (KT), Senior Strategist Jerome Lee (JL), Dealer Lim Jinru (LJR), Dealing Manager Wilfred Chong (WC) and Strategist Lee Yijie (LYJ). Read on for their expert views.
What’s next for the UK?
Scenario 1: If the UK leaves with no deal
KT: Two critical elements are missing, namely, no transition period and no clarity in details in the conduct of work and life. This will plunge UK into a period of large uncertainties on trade, cross-border movements, laws, and subsidies. The pound is expected to experience a period of continual declines with these recessionary factors.
JL: Recent statements from the Bank of England have stated that a no deal Brexit could trigger a recession in the UK with an estimated decline of 5.5% to the GDP while inflation rates will more than double. The immediate market knee-jerk reaction would be a plunge in the Pound with GBPUSD likely to test support levels around 1.2500 and could possibly even challenge the year’s low of around 1.2000.
LJR: The Pound will depreciate and gold prices will surge. A no-deal Brexit will be disastrous for the UK economy and this will lead to an undesirable ripple effect on the global economy as well. I would recommend holding long positions in gold and short positions in US equities.
WC: The Pound will plunge.
LYJ: Being speculated as the most likely outcome for Brexit, the markets should have already reacted accordingly in the months leading up, so large volatility should not be expected. But some divestment to Gold may result as UK undergoes major economical restructuring.
Scenario 2: If the UK leaves with a deal
KT: Pound should see a recovery although details need to be worked through for the implementation of the new deal. Gold likely to maintain its elevated levels with the uncertainties surrounding the impact of the new deal.
JL: The current proposed deal agreed by the EU and UK Prime Minister Boris Johnson would include a yearlong transition period lasting to the end of 2020 that is open to extensions to 2022 for both the UK and EU to agree on new trade agreements. A long transition period could provide some cushion for both parties to agree on more favourable trade deals for both side. Upon a Brexit with a deal, immediate market reactions could see a positive upswing in the sterling pound (GBP) with the possibility of GBPUSD testing resistance levels of the year’s high around 1.3380. A buoyant market sentiment could even find the GBPUSD near the 1.3750 levels.
LJR: This bodes well for the UK economy and is beneficial for investors who hold short positions in gold and long positions in US equities only in the short-term. Uncertainty over the trade agreement could still lead to volatility and cause prices to fluctuate.
WC: This outcome will see a short rally to the GBP. Should the deal be approved, UK will have to pay GBP 39 bio. A transition period till the end of 2020 (which can be extended), will see a gradual recovery of the GBP.
LYJ: Depending on how favorable the terms are, especially trade terms and conditions relating to larger industries (major GDP contributors) within the UK. Investors will continue to tread cautiously and gold as a safe haven instrument usually thrives.
Scenario 3: If Article 50 is revoked and the UK remains in the EU
KT: Potentially, we can see a huge and continued appreciation to the pound to pre-Brexit levels of above 1.38 handle. Gold should see a dip with “risk-on” sentiments, although not expecting it to fall too much with uncertainties still surrounding the US-China trade wars.
JL: This would be the least probable possibility out of the three. With less than two weeks to the 31 October Brexit dateline, there is simply not enough time to organise a public vote to supersede the previous mandate of the people of UK. This is in addition to allow for the due legal processes of both the UK and EU to take place. Unless there is an agreement to delay Brexit once again, we are unfortunately left with only a deal or no deal option.
LJR: Arguably the best scenario. Uncertainty is dispelled from the markets, both UK and EU will enjoy higher economic growth rates and this will positively impact the global economy. In this case, investors are strongly recommended to long US/UK equities and short gold. Pound will likely recover its former strength if Brexit doesn’t happen.
LYJ: In an unlikely scenario that this occurs, a knee jerk reaction is likely to send the GBP skywards as fear of economical instability is assuaged, previously retracted funds will probably reenter the UK economy again, normalizing to pre-referendum levels.
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(By Phillip Futures)
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