The Brexit topic is back in British politics. Labour politicians are now focusing on its long-term impact on public finances and economic growth, which is surprising since they previously shied away from the discussion. On Monday, the pound increased in value against both the US dollar and the euro. This rise happened even though there was not much data to back it up. The euro and dollar weakened, and the Prime Minister’s remarks about strengthening ties with the EU also helped boost the pound.

Brexit Challenges Continue

The UK faced challenges before Brexit, and the situation has gotten worse since. A closer relationship with the EU could help ease some recent issues, but it won’t solve everything. Gaining access to the EU single market may involve trade-offs, and changes may not come quickly. If access to the EU single market improves, the pound could rise even more. Recent currency changes hint at these possible benefits, but it’s too early to see all the positive results from warming relations with the EU. This week, the pound surged based mainly on political comments about a closer UK-EU relationship. This follows discussions from last summer, when politicians began openly addressing Brexit’s negative long-term effects on the economy. Currently, the foreign exchange market seems overly optimistic about these early signs.

Pound’s Fragile Strength

Despite a weak economic situation, the pound recently hit a multi-month high against the dollar. UK GDP growth for 2025 is expected to be just around 1.9%, according to last year’s forecasts. The productivity issue, which existed before the Brexit vote, is still not resolved. This indicates that the pound’s strength relies more on hope than on economic realities, making it prone to changes in sentiment. Because of this disconnect, we should expect increased implied volatility in sterling options in the coming weeks. The current rally feels premature since real access to the EU single market won’t come soon or without major political compromises from the UK. This uncertainty makes it a good time to use options strategies, such as buying straddles, to prepare for potential price swings in either direction. Any formal negotiations will likely be complex and lengthy, requiring compromises on sensitive topics that the market is currently ignoring. Our experience from the original Brexit talks between 2017 and 2019 shows that there is a high level of risk in these situations. Sterling will likely react sharply to any news from London or Brussels, creating significant short-term trading opportunities. Therefore, it’s wise to use derivatives to manage risk, such as buying call options to join in on potential gains while limiting losses if political goodwill fades. Create your live VT Markets account and start trading now.

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