Will the Recent Brexit Developments Lead to a Flash Crash?

Since the referendum took place in 2016, the pound is reacting to every headline concerning the Brexit deal.

This article was submitted by ICM.com.

The latest developments within the financial markets continue to prove that uncertainty is surrounding the divorce deal between Britain and the European Union. Since the preparation of the Brexit referendum, the pound has continuously been subjected to headlines concerning this campaign.

Before the referendum, the polls were affecting the markets. Since the referendum took place on 24th of June 2016, the pound is reacting to every headline concerning the Brexit deal.

For the past two years, the United Kingdom and the European Union held several rounds of negotiations to reach a proper and fair deal where both parties are satisfied. Finally, Theresa May unveiled a draft Brexit deal document, presented it to her divided Cabinet and managed to earn their approval.

However, her latest developments triggered the resignation of several ministers, with the most significant being the Secretary of State for Exiting the European Union, Dominic Raab. He said that he would not be able to sign a deal that is not right for the country in his opinion.

Many politicians believe that the deal is giving up too much sovereignty and it is binding the United Kingdom into a customs union with the European Union. Moreover, the deal unleashed opposition from her own party.

May’s latest proposal could lead to a split in the ruling Conservative Party and threaten her leadership and position as a Prime Minister. Theresa May is having a tough time, especially that several Tory MPs sent letters requesting a confidence vote in her leadership lately.

The threshold wasn’t met, but the MPs behind the letters will not back her proposal, and this will make it harder for May to earn the approval of the Parliament. Theresa May tried to improve on the people’s opinion of her deal by writing a letter to the nation promising the British people that the separation would lead to a new and improved chapter in their lives.

She highlighted the positive outcomes of a Brexit such as better control of the borders, spending British taxpayer’s money on their own priorities, signing new trade deals with other countries, and abandoning agreements that aren’t in UK’s interests.

On Sunday, the EU leaders approved the Brexit deal, and they considered it final. The next step will be a parliament vote on the deal, and May is likely to plan it ahead of the next EU council meeting on 13th – 14th of December. Will Theresa May be able to face the parliament and win the approval?

If the parliament rejects the deal we will be facing one of the following three scenarios: a no-deal Brexit, a general election, or a second referendum.

The recent developments only imply further market uncertainty and higher risks. The British pound and the stock markets have been vulnerable to headlines concerning Brexit and affected the net worth of each British citizen.

On the referendum night, Sterling tumbled more than ten percent, and market participants rushed to blame Algos for the flash crash. Traders should be well prepared and hedged for severe price fluctuations.

Many investors use options to hedge against the implied market volatility, where they can protect themselves against a disaster in case of a “no-deal” Brexit at a specified premium.

Investors should be keeping up with the latest news releases or any developments concerning Brexit and track possible effects on the market. They should asses their portfolio exposure carefully and make sure they abide by the risk management rules.

Moreover, the use of technical analysis in such scenarios is quite common with experienced traders. Technical analysis helps traders detect areas of supply and demand which are known as support and resistance.

Recently, Cable was able to defend support levels between 1.2600-1.2700 which implied heavy demand since mid-August.

However, a break below the support area could trigger a further downtrend, especially because usually a break of a valid support level is accompanied with heavy volume and would accelerate a drop. This scenario could lead to a new flash crash in the case of low liquidity.

Some traders prefer dealing with volatile markets instead of stable markets. They believe that the market conditions will help them generate profits in less time, but this style of trading carries high risks.

Market participants should respect the current market situation and the uncertainty that is surrounding the markets to avoid any heavy losses to their portfolios.

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