How will Brexit affect the British Pound?

British pounds banknotes and coins

In the lead up to the Brexit referendum in June 2016, most in the financial industry felt that the UK would favour ongoing membership in the EU. In fact, the results showed that Scotland voted to remain by 62 per cent and Northern Ireland by 55.8 per cent. England was the deciding factor with 53.4 per cent wanting to leave, with a score of 52.5 per cent also voting to leave in Wales.

The result led to immediate political uncertainty, linked with economic volatility. The British pound fell more than 10 per cent in the hours after the vote was made final, with the pound struggling against the dollar and other currencies. Volatility has continued in the lead up to a withdrawal deal in the years since the referendum.

The effect of the fall in the value of the British pound has meant that holidays and imported goods have become more expensive, while UK exports have been cheaper. These positives are countered by negative consequences of higher costs for importers of raw materials and UK pensioners living overseas who have seen the value of their pensions fall.

Political uncertainty

The value of the British pound has been significantly affected by political uncertainty since the Brexit referendum. This has led to increased volatility in the market. In November 2016, a legal challenge halted the triggering of Article 50, which led to an instant gain in the pound against the US dollar, due to market optimism that the UK would stay in the EU. This ended in March 2017, when the UK parliament voted to pass Article 50, which lead the pound to fall against the US dollar because the UK’s economic future and particularly the Brexit transition process was unknown. By March 2017, when the European Council received the UK’s formal letter to invoke Article 50, the value of the pound had fallen by 17.5 per cent since the referendum.

As Brexit negotiations have continued, the British pound has rallied against the US dollar at every time that an element of political uncertainty has been removed. In October 2018, a cautious U.K./EU Brexit finance deal was put forward by UK Prime Minister Theresa May which was said to give London, already managing about 37 per cent of Europe’s financial assets (EUR6.82 trillion), basic access to EU financial markets. It also included details to prevent a hard border with Northern Ireland. This led to sterling rising against the US dollar and euro since the chances of a hard Brexit appeared reduced.

In April 2019, an extension of Article 50 to 31 October saw volatility of the British pound subside. On 24 May 2019, following the further rejection of her revised Brexit deal, UK Prime Minister Theresa May resigned as head of the Conservative party in Britain and stood down on 7 June 2019. Throughout May, the value of the pound plummeted at the failure of a new divorce deal and May’s resignation.

As the 31 October 2019 final divorce date approaches and the UK Conservative party focuses on finding a new leader, questions surrounding a Brexit deal have brought enhanced volatility to the trading of sterling. The final outcome of Brexit is still unknown.

The worst-case scenario in terms of political uncertainty is a hard Brexit because there are so few details about what this hard Brexit is and the impact it would have on the UK. This means that if it appears that a hard Brexit is an unlikely outcome, sterling will rally, as evidenced by early plans to put Brexit on hold since it allowed more time for businesses to plan ahead.

Options include an immediate exit via a compromise deal to hold a second referendum. The new leader of the Conservative party, uncertainty in the fishing industry and possible Scottish independence are all negative challenges to sterling as could be a new general election and a second referendum. Some currency experts believe that a soft Brexit could bring certainty and confidence to the markets, leading to increased investment and employment and this improved economic activity could lead the Bank of England to raise interest rates, improving returns for savers. We analyzed how Brexit affect House prices and Food prices also.

The UK current account deficit

It should be noted that politics and Brexit are not the only cause of volatility in the value of sterling. In the UK, imports have exceeded the value of the country’s exports, and foreign investors have not been making up the difference due to perceived risk. This on its own has led to a fall in the value of the pound and could do so again in the future. Continuing political uncertainty in the UK and internal fighting within the governing Conservative party will see the British pound remain volatile. Only time will tell the outcome of Brexit.