Posted by Matthew Andrews on June 23rd, 2017.
In recent (and even not so recent) years, few events have rocked the currency market to the extent of the UK’s shock vote to leave the European Union, commonly referred to as ‘Brexit’.
However, what impact has the historic vote to leave the EU had on the Pound one year on? And what could happen next?
After weeks of build-up, accusations of scare mongering and dubious claims from both the ‘Remain’ and ‘Leave’ sides, the UK held a referendum on EU membership on June 23rd 2016, with most analysts and exits polls predicting a win for the remain camp.
However, it soon became clear that pollsters had got things very wrong as the UK electorate voted 52% to 48% to leave the EU.
Before the vote, GBP/EUR hit a high of €1.31.
On the morning after the vote GBP/EUR was trading at €1.23.
The Pound initially plummeted following the vote, falling by over 10% against the other major currencies and reaching a new 30-year low against the US Dollar.
Sterling sentiment was weakened further by the resignation of Prime Minister David Cameron, which created doubts over the leadership of the Conservatives and caused concern that the UK would be rudderless during negotiations with the EU.
The Tory leadership contest led to former Home Secretary Theresa May assuming the role of Prime Minister on July 13th and helped the Pound stabilise after a turbulent few weeks.
Despite campaigning for ‘Remain’ during the referendum, Theresa May promised to lead the UK out of the EU, coining her now infamous phase, ‘Brexit means Brexit’.
May also elected a number of prominent Brexiters into her cabinet, including Liam Fox as trade secretary and Boris Johnson as foreign secretary.
In reaction to the devaluation of the Pound following the EU referendum, the Bank of England voted to lower interest rates to a new record low of 0.25% at the start of August, with BoE Governor Mark Carney signalling that the move was to help promote growth and stimulate inflation.
At this time the Pound was also softened by rising concerns emanating from the City of London as a number of large financial firms grew increasingly worried about what impact Brexit would have on their ability to operate in the UK.
By August GBP/EUR had dropped to €1.15.
The Pound continued losing ground against it peers over the following months as markets grew frustrated by the lack of a clear government plan for Brexit.
May spoke at length about getting the best deal for the UK, but refused to clarify what this would actually entail. She remained adamant that the UK’s split from the EU and a future trade deal could be finalised within the two year negotiation period stipulated in Article 50 of the Lisbon Treaty, however many analysts remained sceptical of this.
With May seemingly reluctant to share her plans for Brexit, investors became nervous of the possibility of the PM pursuing a so called ‘Hard Brexit’, which would see the government cede access to the single market in order to gain greater control of Britain’s borders.
Analysts warned that loss of access to the free market could have a detrimental impact on the UK economy, with speculation running rampant that a number of companies would seek to move to the continent in order to avoid possible tariffs placed on exports to Europe.
Sterling’s weakness reached a boiling point in on 7th October following a ‘Flash Crash’, which saw Pound nosedive over 6% in minutes, with the drop prompting many economists to predict that the Pound would reach parity with the Euro by the end of the year.
On 7th October the GBP/EUR exchange rate dropped to €1.10.
The Pound was finally able to reverse its fortunes in November thanks to a landmark Ruling by the High Court that stated the government would not be able to activate Article 50 without first putting it to a vote in parliament.
The ruling, which was later held up by the Supreme Court, led to hopes that MPs would get some say in the final Brexit deal, with hopes that May’s opponents would attempt to block her apparent plans for a hard Brexit.
Sterling was also strengthened by the shock outcome of the US President Election, with investors seeing the victory for Donald Trump as increasing the chances for a post-Brexit UK-US trade deal after Trump previously said that Britain would be first in line when looking to form a new trade agreement once it left the EU.
Theresa May finally outlined her plans for leaving the EU at the start of 2017, all but confirming that the UK would be headed for a hard Brexit as she sought to regain control over immigration even if it came at the expense of access to the single market.
However despite this appearing to confirm the fears of most investors, the Pound actually advanced as markets were happy to finally have some clarity on the government’s negotiation strategy.
The eventual activation of Article 50, with happened in March 2017, had little impact on the Pound.
Markets were shocked on April 18th by Theresa May’s sudden call for a snap election, with the Prime Minister claiming that the early election would give the government a clear window in which to negotiate Brexit.
Market sentiment towards the Pound rocketed following the news as the Tories’ 26 point lead in the polls led most analysts to predict a landslide victory for the Conservatives, which would grant May a mandate to pursue her plans for Brexit.
The GBP/EUR exchange rate rocketed to a high of €1.19 on the snap election news.
A better than expected campaign by leader of the Labour party Jeremy Corbyn and a higher than expected youth turnout caused a major upset for Theresa May on 8th June as she failed to convince the electorate to support her plans for Brexit, leading the Conservatives to lose their majority in parliament and causing the Pound to relinquish most of its gains since the snap election was called.
Nearly a full year after the vote for Brexit, negotiations between EU officials and the UK government finally got underway on 19th June.
The GBP/EUR exchange rate is currently trading in the region of €1.13 – roughly 17 cents lower than it was before the UK voted to Brexit.
It is difficult to predict the exact outcome of the talks and their future impact on the Pound, especially in light of the current political uncertainty, with rumours floating that Theresa May could be ousted by her own party.
However, most markets remain clear in their desire for the UK to remain in the single market (or least for the government to negotiate a new trade agreement) with the failure to do either likely to send Sterling plummeting to new lows.
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