Brexit’s Impact on the Pound

Alexandros Papadogeorgopoulos

 

- Since the UK’s vote to leave the European Union, social, economic and political uncertainty has been caused. Since that day, a series of events have taken place as part of the transition process, whose negative outcome has been heavily reflected on the value of the British Pound.


Starting from the referendum day and the immediate weeks after that, sterling saw a sharp fall in its value of about 10.4% against the Euro on 6 July 2016.

The next notable depreciation of 4.6% happened in October 2016 during legal negotiations regarding whether Theresa May could make the transition occur without Parliamentary approval, something that seemed to cause even more uncertainty to the public.

A couple of months later, on January 2017, speculations regarding May’s hard approach to Brexit arose, leading to a further 3.45% fall in the value of the British currency.

As if the pound had not experienced enough turmoil, the general election results in June 2017 that led to May losing her majority government, brought about a seven month low value of €1.1287 per pound.


Up until 2018, its value increased gradually, until the submission of Theresa May’s draft Brexit agreement to her cabinet on 15 November, which caused sterling to fall by 1.8% to €1.12/pound – the largest weekly plunge since last summer.

Despite the general gloominess seen above, according to analysts the pound might see some good days in 2019. It has been claimed that it may rise up to 4.6%, though this can be compromised depending on the progress made with regard to the Brexit deal and as such the political stability of the country.


The chart below gives a clearer image of the pound’s value over the time period between 23 June 2016 and 30 November 2018.



Although we can see several fluctuations in the pound’s value, the trend (yellow line) is downward-sloping. Thus, it can be seen that the British currency has lost in total about 13.8% of its value against the euro since the day of the referendum.


­What does the fall in the pound’s value mean for different stakeholders?


When a currency depreciates, that is its value falls, it is considered a bad sign for an economy. Specifically the purchasing power of natives travelling abroad falls, meaning that they now need more pounds to convert to the same amount of the foreign currency. Apart from the individuals, depreciation can also be bad for businesses that base their production on imports. That is because they now have to give up more pounds to buy the good(s) they import. In other words, with the same amount of pounds they buy “less” of a good. If this is the case, then companies are likely to raise their prices so as to cover for these input costs, something unpleasant for consumers.


On the other hand, as a result of the depreciation, exports are likely to become cheaper and thus more attractive to foreign buyers. This provides a boost for domestic demand and could lead to job creation in the export sector. On top of that, since imports are now more expensive, as explained above, they become less attractive. In essence, this means that more exports are sold (therefore money comes in) while fewer imports are consumed (thus less money goes out). As a result, exports minus imports (X-M for short), which represents the trade balance of a country, increase.


No matter the outcome of the Brexit deal, the general notion remains that the pound will be better off if the transition does not happen next year. However, no one can be certain and the outcome of the years-long negotiations and disputes over the matter and eventually its effects on the British currency, remain to be seen when the transition takes place.


 

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