The foreign exchange markets (forex or FX) are the largest trading venues in the world, featuring about $3 trillion per day in turnover. On the forex, international currencies are pitted against one another, with millions of traders picking their favorites on a 24/5 basis. Not to be left out of the massive global currency trade, the Chicago Mercantile Exchange (CME) offers a collection of FX futures products based upon the most popular forex pairs.
From the U.S. dollar to the Indonesian rupiah, currency values regularly fluctuate according to pressing economic, social, and political issues. For the British pound (GBP) and British pound FX futures, Brexit has been the premier catalyst driving market volatility since June 2016.
Trading FX Futures Successfully: Addressing Volatility
FX futures feature periods of enhanced pricing volatility in relation to the exchange rate variance of the underlying forex pairing. Central bank actions, political upheaval, and economic performance are the three primary factors behind a currency, or currency pair’s, relative value. In the case of the GBP, the Brexit vote and transition process has brought levels of volatility not seen since Black Wednesday in September 1992.
If you’re going to trade forex pairs or FX futures, then it’s a good idea to be aware of these three market fundamentals:
- Central banking activity: The periodic raising or lowering of interbank lending rates plays a key role in the valuations of a domestic currency.
- Politics: Import/export tariffs, elections, regional trade agreements, or extraordinary events such as Brexit can have dramatic impacts on currency exchange rates.
- Economic performance: Economic growth, output, and consumption are all integral aspects of adopted monetary policies. Metrics such as GDP are prime factors in determining the probability of inflation, in turn influencing central banking authorities.
Successfully engaging the currency markets is dependent upon being prepared for sudden swings in exchange rates due to the factors above. Long periods of relative calm often define the market structure of FX futures, but any of these fundamentals is capable of rapidly spiking volatility.
British Pound FX Futures and Brexit
The Brexit era in the United Kingdom has presented many challenges and brought unprecedented uncertainty to the British pound sterling. From passage of the referendum in June 2016 to negotiating terms of the U.K./EU divorce, the GBP has been on an exchange rate rollercoaster for nearly three years.
In practical terms, the British pound FX (6B) is based upon the GBP/USD forex pair. Accordingly, any volatility evidenced by the GBP/USD is immediately apparent in British pound FX futures. Here are a few points during the Brexit transition where the GBP/USD and British pound FX experienced enhanced price action:
- Vote to leave EU: When the vote to leave the EU became final, the GBP experienced a massive plunge, losing 10% against the USD in hours.
- Article 50 evoked: A period of enhanced volatility surrounded the triggering of Article 50 of the Lisbon Treaty. Initially, a legal challenge delayed the enactment of Article 50, boosting the GBP against the USD by an immediate 1.2%. However, after passage of Article 50 by Parliament, the GBP gave back most of the gains, immediately falling 0.7% against the USD.
- Postponement of final divorce date: In spring 2019, the U.K. Parliament reached a deadlock, prompting Prime Minister Theresa May to ask for a divorce date extension from the EU Council. An extension until October 31, 2019, was granted. The GBP enjoyed a period of relief in the aftermath, posting tight daily ranges as markets digested the political developments.
Each of these events brought enhanced volatility to the GBP/USD and British pound FX futures. While conventional wisdom tells us that markets are not fond of uncertainty, the unprecedented U.K./EU divorce took exchange rate turbulence to levels not witnessed in decades.
Which to Trade ― Forex or FX Futures?
Although it’s true that an overwhelming majority of the global currency trade occurs on the forex, standardized futures contracts offer several unique benefits to active traders. Reduced intraday margins, as well as an “all-in” fee and commission structure, make trading FX futures a viable alternative to forex currency pairs.
For a comprehensive look at your options for engaging the foreign currency trade, schedule your complimentary no-obligation consultation with a member of the Daniels Trading team today.