article 50 UK EU brexit paper pen form

Brexit: Article 50 and the GBP

In Business and Currency by Continental StaffLeave a Comment

Yesterday Prime Minister Theresa May triggered Article 50 of the Treaty of the European Union, which means that the UK has exactly two years to negotiate its exit from the EU.

How did we get here?

Last summer former Prime Minister David Cameron followed through on a campaign promise to hold a referendum on UK membership in the EU. Cameron campaigned to remain in the 28 member bloc but ultimately miscalculated, lost the referendum and resigned, triggering a Conservative Party leadership race won by Theresa May who thus became Prime Minister.

 

What effect did Article 50 have on the pound?

After the Brexit vote in June of 2016, the pound plummeted 11% against the USD in just one day – the largest drop in the history of the currency – until it finally reached the lowest level since 1985.

After taking power less than a month after the Brexit vote was confirmed in July of 2016, May promised to uphold the referendum results which weighed heavily on the pound, causing it to remain low.

USD US dollar GBP british pound graph chart rate

Since October the GBP has remained around the US 1.25 mark.

Unlike the shock of the referendum, the reaction of the pound to Article 50 being triggered was largely ambivalent. In fact, you can see here that over the last month the GBP has actually been strengthening:

USD US dollar GBP british pound graph chart rate

There was a slight blip caused by Article 50, but the currency is still performing better than it had been at the beginning of the month. At the time of writing the GBP is at a mid rate of US 1.24806.

Part of the reason the pound had such a mooted response to Article 50 is that we knew it was going to happen. Prime Minister Theresa May had been forthright about her commitment to leaving the EU, and even gave a rough timeline. There were no surprises, and in currency markets, stability is everything. The consequences of triggering Article 50 had already been priced into the value of the pound, so there were no significant movements.

British pound to euro

Even though the UK does not use the euro the two currencies are closely linked. After Brexit, the GBP fell to historic lows against the EUR by October, but rebounded somewhat afterwards. So far Article 50 does not seem to have had a detrimental effect on GBP/EUR trading. The ECB’s (European Central Bank’s) own loose monetary policy, combined with perpetual uncertainty in Greece, the migrant crisis, and Brexit means that the euro also remains depressed.

EUR euro GBP british pound graph chart rate

GBP to CAD

The GBP followed a similar pattern against the Canadian dollar as it did against the USD, EUR, and other major currencies. It performed strongly until the Brexit vote, and then fell sharply. Like the euro, the CAD has had its own troubles caused by falling oil prices, and a low central bank interest rate, cushioning the GBP’s fall. The GBP probably won’t strengthen significantly any time soon, but nor will the CAD (unless we see a surprise increase in bank rates or an explosion in oil prices).

CAD canadian dollar GBP british pound graph chart rate

Outlook for the pound

According to the Independent, “Most economists predict the pound will trade at $1.23 against the dollar by the end of June, and drop to $1.21 in the subsequent three to six months” however the article also noted that Deutsche Bank “said that the pound could fall as a low as $1.06 against the dollar by the end of 2017, or another 15 per cent.” Such a massive drop would bring the pound to a new 31-year low. Whether this stark prediction will prove accurate is still very much uncertain.

brexit newspaper out Britain EU tabloid

Soft or Hard

Now that Article 50 has been triggered the pound’s fate really rests with one key question: will it be a ‘hard Brexit’ or a ‘soft Brexit’?

Hard Brexit

A hard Brexit would involve the UK giving up access to the EU’s single market and customs union. This would mean that the UK would have full control over its borders and trade deals, but it would also probably make British goods and services less competitive in the EU, and EU goods and services more expensive in the UK. A hard Brexit would almost certainly result in a less favourable economic position (in relation to the EU) than that which currently exists, causing the GBP to fall. A hard Brexit does however open up greater negotiating room for the UK to strike trade deals with countries like the US, Canada, India, and China.

Soft Brexit

A soft Brexit would mean that certain rules and regulations that the UK currently adheres to as part of the EU would continue. In return the UK may get continued, or preferential, access to the EU single market and customs union. Many Brexiteers have pointed to countries like Norway which has access to the EU market as it is part of the European Economic Area (EEA), as a model for a potential soft Brexit deal. This deal, however, would almost certainly require Britain to forfeit some control over immigration (a central issue in the referendum), and the continuation of certain EU regulations.

Effect on the GBP

Simply put, a hard Brexit will hurt the pound and a soft Brexit will strengthen it, and until the final deal is reached the markets will move up or down depending on whatever seems more likely at the time.

british pound euro 50 note money cash

How to save on GBP and Euros

If you are planning a trip to the UK or EU, then here are some simple tips to help you save on your exchange:

  1. Use a currency tracker to find the best rates as soon as they occur.
  2. Choose the right currency exchange provider, be wary of hidden fees.
  3. Take advantage of discounts, some currency exchange providers offer seniors’ discounts and run promotions.
  4. Keep an eye on the news and the latest analysis for indications that currency rates could change.
  5. Lock in good rates, when rates fall buy your currency and hold it until you need it!

Follow these tips and whatever happens to the CAD, GBP, or EUR you will get the best deal available!

Stay informed. Stay Current.