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Brexit: The impact on GBP, and what may happen next

By Connor Freitas
October 7, 2019, 2:57 PM GMT
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    The chaos surrounding the UK’s departure from the European Union shows no sign of abating — and Brexit’s effect on the pound has been massive.

    The chaos surrounding the UK’s departure from the European Union shows no sign of abating — and Brexit’s effect on the pound has been massive.

    The value of the pound since Brexit is best compared to a rollercoaster: plenty of highs and lows, with some terrifying drops along the way. These declines usually coincided with developments that suggested a “no-deal” Brexit was becoming more likely. This is where the UK would crash out of the EU without an agreement — with the country instantly losing access to trade arrangements, regulatory bodies and EU-wide law enforcement.

    Before we delve deeper into the Brexit effect on sterling, let’s have a quick recap of the current situation.

    Brexit has already led to the resignation of one prime minister, with Theresa May failing to get British MPs to support the deal she had reached with the European Union. Although some UK politicians now want to re-enter talks with Brussels, the EU has warned it is unanimous there will not be any renegotiations. May’s successor in 10 Downing Street is Boris Johnson, a colorful and boisterous politician who has vowed to take the UK out of the EU “do or die” on October 31, the current deadline. He has also warned he would rather “die in a ditch” than ask for another extension to the departure date — given how the country was meant to leave on March 29 2019.

    With the clock ticking menacingly down to October 31, there seems to have been little movement on reaching a new Brexit deal. MPs in the Houses of Parliament have successfully voted to make a no-deal Brexit illegal on October 31. Parliament was briefly suspended too, but the PM’s decision was overturned by a Supreme Court ruling. All eyes are now on a crunch EU summit that will take place on October 17 and 18, where Johnson “very much hopes” to seal a deal.

    Brexit impact on GBP: Explained

    All of this political uncertainty means there has been an undeniable Brexit effect on sterling. The picture has been a mixed one for consumers. Sterling has weakened against the dollar, meaning that holidays are more expensive for British tourists heading over to the United States. That said, foreign visitors to London have seen their spending power increase substantially — and this has been something of a boom for British retailers. Figures released in August 2019 showed the number of Chinese tourists visiting the UK was set to rise by almost 20% over the summer, reaching all-time highs, as a stronger yuan whetted appetites for designer goods in London’s shopping districts.

    Elsewhere in the business world, a weaker pound has been a bittersweet blessing for British companies exporting their products internationally, as the weak pound has made their pricing more competitive with global rivals. Of course, there are two sides to the coin here. Any businesses that need to import raw materials in order to make their goods will have seen prices rise, and these costs often need to be passed on to customers. We’ve also seen British corporations increasingly become a target for acquisition by foreign rivals, as the weakened pound have made them more affordable.

    The humble pound had been regarded as a safe haven before the vote to leave the EU on 23 June, 2016 — and its performance against major currencies such as the euro and dollar has failed to recover in the years since. On the day of the referendum itself, eleventh-hour polls had indicated that the UK had voted to stay in the trading bloc, with £1 buying €1.32 and $1.50. When the actual result became clear, the Brexit impact on GBP was swift. In the biggest intra-day collapse seen for 30 years, GBP/USD slumped to €1.20 and $1.32.

    So that gives us an illustration of the pound before and after Brexit was voted on, but what’s happened since? Well, the Brexit effect on the pound has continued to be felt — with new lows constantly being reached and fears growing that sterling could reach parity with the dollar, meaning £1 gets you $1.

    Here are some of the big milestones to affect GBP/USD since June 2016:

    • October 2016: Pound sinks to intra-day lows of $1.18 — a 30-year record — as Theresa May announces the UK will trigger Article 50, the formal process for leaving the European Union, in March 2017
    • April 2017: Sterling leaps to $1.28 as Theresa May calls a snap election, one that she would fail to win outright
    • March 2018: The pound regains ground as a transition deal is announced — reaching highs of $1.43 — but plunges as pro-Brexit ministers resist it
    • August 2018: Resignations in Theresa May’s government and growing concern of a no-deal Brexit sees sterling fall below $1.29
    • July 2019: Lows of $1.22 is reached as Boris Johnson becomes PM and commits to no-deal Brexit if agreement with EU is not reached
    • September 2019: The pound bounces back after MPs manage to block a no-deal Brexit in a landmark vote, driving optimism it will be avoided

    Reading between the lines, we can see that Brexit’s effect on the pound is directly linked to uncertainty. It’s clear the markets would prefer the UK to leave the EU with a deal in place and a stable government in Westminster. But with such a febrile and unpredictable political climate, who knows where the pound will head next.

    Tokenised securities are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how tokenised securities and leverage work and whether you can afford to take the high risk of losing your money. Nothing in the above article should be regarded as a recommendation to trade generally, to trade on a particular platform or to trade in a particular asset. Asset prices can go down as well as up and past performance is not a guide to future performance. Investors and traders should thoroughly research an asset or strategy before making any trading or investment decision and if necessary seek professional advice.

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