While rainy weather can be a constant in London, residents of the broader United Kingdom are likely feeling more weathered than usual due to the constant onslaught of uncertainty brought on by “Brexit.”

Brexit has been pressuring the good life in the UK for three-plus years now (most recently with the ouster of Prime Minister Theresa May) and looks poised to claim another victim—the British pound. 

The pound has been on a never-ending rollercoaster since the Brits first elected to leave the European Union in 2016, and the ride now appears to have reached one of those stomach-wrenching cliffs that typically produces the highest pitch screams at the amusement park.

Since the election of Boris Johnson as the new Prime Minister of the United Kingdom, the Pound has dropped to roughly 2-year lows and is threatening to close the year at the lowest levels seen since 1984 (relative to the U.S. dollar).

Since 1984, the pound has closed the year only three times trading for less than 1.30 US dollars per pound. Those years would be 2018: 1.27, 2016: 1.23, and 1984: 1.16. The pound/dollar exchange rate is currently trading around 1.22, and has dropped precipitously since new Prime Minister Boris Johnson took office less than a week ago. 

The most common reason attributed to the recent pound slide is the fact that a “hard” Brexit is now looking more and more likely.

As Brexit has unfolded, the pound has exhibited a rather predictable trading pattern. Generally speaking, it tends to rally when the likelihood of a “soft” Brexit is rising, and it tends to fall when sentiment is leaning toward a “hard” Brexit.  

As a reminder, the two most likely outcomes for Britain leaving the European Union tend to be expressed as either a “soft” or “hard” Brexit. 

The latter outcome is attributed to a hypothetical situation in which the UK and Britain have successfully negotiated a “withdrawal agreement” that helps anchor the ongoing relationship between the two regions. On the other end of the spectrum is a “hard” Brexit, which basically equates to the UK crashing out of the EU, with no deal in place whatsoever. 

It’s the unpredictability and uncertainty associated with the “hard” version of events that has the pound and other niches of the international financial markets on edge— especially with “hardline” Brexiters now in control of the British government. 

Currently, a word that accurately describes the state of negotiations between the EU and the UK would be: “stalemate.”

Johnson has stated that the “soft” Brexit deal negotiated by his predecessor May is unacceptable. On the other end of the table, leaders from the EU have made clear that their best offer is already on the table. Neither side looks willing to make any sort of concession—at least not in the immediate future. 

The fact that Johnson stacked his cabinet with Brexit hardliners has also weighed heavily on the pound. He stated shortly after his election that if a deal is not in place by Oct. 31, 2019, he stands ready to take Britain out of the EU the hard way.

Looking back at a historical chart of the pound/dollar exchange rate, one has to go all the way back to 1984-1985 to find levels lower than where the pound is currently trading (to close the year). The next two major lines in the sand appear to be 1.16, and then 1.05. 

Each of those levels is a far cry from 1.70, which is where the pound/dollar exchange rate lived as recently as 2014.

Looking at another alternative, if negotiations are restarted, and a “soft” Brexit starts looking more likely, the pound/dollar exchange rate could bounce back extremely quickly—likely ripping above the 1.30 level. The pound/dollar has traded at 1.30 or above during other periods in the last few years that were characterized by relative optimism regarding a “soft” Brexit. Traders seeking to learn more about potential opportunities relating to the British pound can tune into a recent episode of Closing the Gap: Futures Edition on the tastytrade financial network for more information.

Sage Anderson is a pseudonym. The contributor has an extensive background in trading equity derivatives and managing volatility-based portfolios as a former prop trading firm employee. The contributor is not an employee of luckbox, tastytrade or any affiliated companies. Readers can direct questions about any of the topics covered in this blog post, or any other trading-related subject, to support@luckboxmagazine.com.