There are a variety of factors that can influence exchange rates, but one of the most prominent factors is a global event or change like Brexit. Brexit’s influence on the GBP is on every trader’s mind and is certainly going to impact currency exchange rates around the world.
It’s been a long road to Britain’s exit, and it’s still not done. But we’ll try to recap some of the most important events in this complicated era of British politics as well as the changing fortunes of the GBP.
The vote for Britain to leave the European Union was one that not only impacts Britain and the EU but the entire world. The aftermath of the Brexit referendum in June 2016 led to a sharp decline of the pound. Both the pound and the FTSE 100 fell nearly 10% immediately after the vote. In addition, Prime Minister David Cameron resigned and, amidst the political turbulence, the pound fell the lowest it’s been in over thirty years.
In the weeks and months after the referendum, the pound’s value was on a rollercoaster ride. After Theresa May became Prime Minister and she controversially appointed Brexit supporter Borris Johnson as Foreign Secretary in July 2016, the GBP began to rise again with the newfound political stability.
2017 and 2018
The pound slowly continued to recover in 2017. In March 2017, Theresa May triggered Article 50 which set a two-year deadline to negotiate the exit from the EU. Negotiations continued throughout the year until the withdrawal Bill was passed in December 2017 which further strengthened the pound. Following this, trade talks and negotiations were held throughout 2018 with little progress.
In a test of her leadership, Theresa May faced and won a vote of no confidence in December 2018. However, she was not out of the woods yet.
2019 So Far
In early 2019, May put forward two deal agreements which were rejected. Given the fast-approaching deadline, Article 50 was extended in March 2019. This proved only a stay of execution for May and, after three rejected agreements, she resigned on May 24th. Her former Foreign Secretary Boris Johnson was elected PM and replaced May on July 24th.
On October 17th of this year, PM Johnson accomplished what his precursor Theresa May couldn’t: he struck a deal and agreed to an exit plan. However, the deal still required approval from both the EU and UK parliaments. Thus, the Brexit deadline was once again extended to January 31st 2020.
Parliament voted to go to the polls and a new general election was called for December 12th. Boris Johnson and the Conservatives are running against Jeremy Corbyn’s Labour Party. Corbyn has lead the centre-left party since 2015. While this is a general election, Brexit is at the forefront of voters’ minds.
If Boris and the conservatives win a majority, their “get Brexit done” mandate is likely to come to fruition quickly. If Corbyn and the Labour party win, they have promised to negotiate a better Brexit deal and re-open the choice of staying or leaving the EU with a new referendum. Since Brexit opinions cut through traditional party lines, it is difficult to predict how the election will result.
Through the whole process and umpteen delays, Prime Minister Boris Johnson has insisted Brexit will happen – one way or another. Channelling pro-Brexiters and nationalists, Johnson has been hyping and rallying energy and propaganda throughout the entire ordeal. When asked if he would request another extension, Johnson replied: “I’d rather be dead in a ditch.” The do-or-die attitude of the prime minister is bold, to say the least – but with the deadline approaching again we’ll see if he stays the course.
Despite Johnson’s gusto, his popularity has fallen, and many predict another extension or a second referendum vote. If Johnson and the Conservatives fall even a little below the majority in the general election, his ability to remain prime minister will be tenuous.
If the result of the vote is a hung parliament, it is likely there will be another extension followed by a second referendum (whether Johnson wants it or not).
How Brexit Affects the Pound
Many forex traders consider politics as much as economics when investing in foreign exchange. Political turmoil or instability negatively impacts currency due to the risk and uncertainty associated with the country’s and currency’s future. The initial vote saw the pound plummet in value. It has since climbed back up in a “two steps forward, one step back” fashion.
It is difficult to predict the full consequences of Brexit on the UK economy. A hard Brexit (the UK leaving without a trade deal) would mean the UK giving up its tariff-free trade status. Meaning, tariffs would impact the UK’s exports and imports and a hard border with Europe would create delays since everything would have to go through customs. However, a soft Brexit would allow the UK to continue to benefit from the EU single market and customs union.
The pound has done well so far under Johnson’s lead. If the conservatives win a majority, it is likely that the pound would continue to strengthen. Likewise, if an orderly Brexit is achieved, the political stability would, in turn, stabilize the pound. However, if there is another extension or referendum, the political uncertainty will keep the pound on shaky ground.
Brexit and Travel
Tourism is one area that has seen the positive effects of Brexit. With the pound on the slide, travellers have been making their money go further with the low exchange rates and flocking to the UK. Although the pound has been climbing recently, travellers and traders can use a rate tracker and buy their currency when the rate is lower. A boom in tourism is good news for the UK economy – and good news for anyone looking to take a trip across the pond. In addition, a lower pound encourages Britons to opt for staycations and stay local rather than travel outside the UK – another good thing for the country’s economy.
With so many failed deals, extensions, and negotiations, anyone following Brexit events probably has political whiplash by now. Likewise for anyone tracking the pound’s dips and rises as Brexit unfolds. However, as the election is tomorrow, Brexit is one step closer to denouement – one way or the other.
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