Brexit 101 – Simple explanation and repercussions

What is the meaning of Brexit?

Brexit stands for British Exit. It is a play of words people use to explain the will of the Brits to leave the European Union.

What is the European Union?

The EU is a political union of 28-member states that trade with each other and allow citizens to move and work freely within the territory.

Why does the UK want to leave the EU?

On the 23rd of June 2016, the British voted in a referendum in favour of leaving the union. The ‘Leave’ voters won the referendum by around 52% of the votes. The UK will officially leave on the 29th of March 2019.

At the time, the main issues of concern for the ‘leavers’ were about immigration, the protection of borders and the UK’s will to have more control away from Brussels.

What has happenned until now?

The 2016 vote was just the beginning. Since then, the UK has begun to negotiate what we can call a "divorce agreement", to decide exactly the conditions of exit from the union.

These negotiations, undertaken by the British Prime Minister Theresa May, have concluded the following:

1) The sum of money that the UK will have to do to the European Union to exit: about 39 billion pounds, equal to 43 billion euros;
2) What will happen to English citizens living in Europe and what will happen to European citizens living in England;
3) How to avoid the restoration of the borders between Northern Ireland (UK) and Europe (through the Republic of Ireland).

4) A period of time called "Transition Period" during which time will be given to companies to "adjust" to the new political order.

All the other 27 member states have signed this agreement.

The ball now lies with the British as their parliament will have to vote wheter or not to ratifiy this agreement. The vote, which was supposed to be held on the 11th of December 2018, will be held tonight.

What happens if the parliament rejects the agreement?

On March 29, 2019 England must leave the European Union. If no agreement is reached, the UK leaves the union without a deal. This means that there will be no transitional period to allow companies to adapt and EU laws will no longer apply in the UK (and vice versa).
Speaking about the financial sector for example, a bank or broker with FCA license will no longer be able to provide its services throughout Europe, something that has been done to date. This will also affect day to day issues like food and medicine coming from the EU as there will be more delays when crossing the border.

Another assumption might be a second referendum which until a few months ago was unheard of but has been gaining momentum over the past weeks following the disagreements about May’s deal with the EU.

Which are the major assets most likely to be affected?

The most volatility will be seen in the FX market with pairs like the GBPUSD, EURGBP and EURUSD likely to be affected the most. So, how ill the GBP move?

Scenario 1:

Vote accepted by UK parliament 
Orderly Exit : Sterling to rally as this is a very unexpected outcome and currently not priced in. A huge dose of uncertainty is removed, at least in the short/medium term.

Scenario 2:

Vote rejected by UK parliament
a) Disorderly Exit: Pound falls massively (BOE to hike interest rates quickly to combat inflation and the currency’s decline). I expect the fall to be similar to what we witnessed after the Brexit referendum
b) No confidence vote on May -> General Election: Pound to rally
c) Second Referendum: Pound to rally strongly

What’s the probability?

At the moment it seems that the most probable scenario is that the vote is rejected however it is still not clear if this means a second referendum, new election or a disorderly exit. Whatever will happen, the current environment is creating a lot of opportunities in the forex market for traders.

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