The Brexit – British exit – from the European Union remains one of the most highly publicized events in recent history. Numerous studies have been conducted by the University of Oxford, and Reuters Institute detailing how much importance the press gave to the Brexit issue a.k.a. the EU referendum. According to analysis over a 4-month period, some 2,378 articles were analysed. 27% of them were in favour of a Bremain (Britain remains in the EU), and 41% were in favour of a Brexit. The negative tone of the Brexit campaign punctuated thousands of published articles, as the sharp political divide split the UK electorate down the middle.
UK media outlets in favour of a Brexit included the Daily Express, the Daily Mail, the Sun, the Daily Telegraph, and the Times. Newspapers preferring a Bremain outcome included the Daily Mirror, the Guardian, and the Financial Times. The key issues driving the Brexit saga among conservatives were restricted to: migration, regulations and sovereignty. On the flipside, Labour cited economy and sovereignty as the main concerns. By the end of the Brexit mudslinging contest, the final votes were tallied in favour of a Brexit. The EU referendum results read as follows:
- 51.9% in favour of leaving the European Union with 17,410,742 votes
- 48.1% in favour of remaining in the European Union with 16,141,241 votes
The margin was 52%/48%, with most voters inWales and England preferring to leave the EU (53.4% versus 46.6% for England, and 52.5% versus 47.5% for Wales). At the time, nobody anticipated precisely what would happen with sterling. The Brexit referendum took place on June 23, 2016. At that time, the GBP/USD pair was trading around 1.47. Shortly thereafter, sterling crashed to a 31-year low, sending the UK economy into a tailspin. The short-lived depreciation of the GBP – relatively speaking – had a major impact on imports, exports and economic sentiment. When the GBP weakens relative to its peers, imports become more expensive, while exports tend to flourish. Unfortunately, in the UK, the problem was compounded by the fact that multinational companies were planning to close shop in the London metropolis and elsewhere and relocate to other European capitals. This domino effect – particularly in the financial sector – further undermined the GBP.
According to Article 50 of the Lisbon Treaty, the UK Prime Minister – Theresa May – officially gave notice of the UKs intent to leave the EU. The negotiation timeframe is limited to 2 years, which placed the UKs departure at March 29, 2019. Brussels recently approved guidelines for additional negotiations between the UK and the EU. The UKs Brexit secretary, David Davis and the EUs negotiator, Michel Barnier thrashed out agreements vis-à-vis the state of current negotiations. Detailed talks are ongoing, and a Political Declaration on the Framework of Future Relations is being worked on. The 21-month transitionary period post-Brexit will be finalized by June 2018. This intensive divorce settlement between these major European power blocs has boiled down to 3 contentious issues: Rights of EU citizens in the UK and vice versa, financial obligations for Britain Post Brexit,and the border issues and common travel areas.
How Is the GBP Performing in the Wake of Brexit Turbulence?
The above graphic represents the performance of the GBP/USD pair since August 2016. Post-Brexit blues rattled sterling and sent it plunging to multi-decade lows. However, the resilience of GBP has shone through as evidenced by the dramatic strengthening of sterling over the past 2 years. The uptrend is a testament to UKs economic strength in the face of overwhelming geopolitical uncertainty. However, in between the whipsaw movements of GBP, there are dramatic price fluctuations which lasted for several weeks at a time. This degrades the stability of international trade, money transfers and economic activity in the United Kingdom.
Consider for example the dramatic price drop from September 6, 2016 (1.34) to 1.21 on October 11, 2016. Similar trends are evident on September 15, 2017 when the GBP/USD pair was trading at 1.36 to October 6, 2017 when it was trading at 1.31. A sharp appreciation of the sterling took place between December 15, 2017 and February 1, 2018 when it rose from 1.33 to 1.43, before settling around the 1.40 range recently. Sterling has traditionally been a stable currency; however, the Brexit saga has upended that stability with significant instability over the past 2 years.
Anything Can Affect the Stability of GBP Currency Pairs
For many folks, it appears as if the Brexit negotiations are all over the map. At some points, sentiment indicates that consensus has been reached, yet something transpires to throw things for a loop. This is immediately evident in the exchange rate of the GBP/EUR, GBP/USD, GBP/JPY and others. Buying and selling behaviour of sterling, especially among speculators is heavily dependent upon the nuanced statements, sentiments, and media coverage of meetings taking place between David Davis and Michel Barnier. Anything that sounds positive is generally perceived as a bullish indicator for GBP, while any disagreements on key topics can send the GBP lower.
Forex buying/selling behaviour is heavily affected by the Brexit saga. Matt from Money Transfer Comparison, the editor of the company, indicated that the past few months have reflected lacklustre trading in GBP, and interest in reading about money transfers to/from the UK. It appears that many folks in the UK and in Europe cashed out before the Brexit voteswere cast on June 23, 2016 and enjoyed the relatively strong position of the GBP/EUR at the time, or they let it ride, and are now unlikely to make any major financial decisions (such as big transfers, remittances, sales of assets in the UK/EU etc.) for the time being.
The GBP/EUR currency pair is hovering in the region of 1.14 and thereabouts. On 23 June 2016, the GBP/EUR pair was trading at 1.30999,and has lost approximately 12.97% in two years. To put things into perspective: a UK property worth £500,000 would have fetched €655,000 on June 23, 2016. Today, that same property is worth €570,000. That explains why UK residents are not cashing in their GBP for EUR just yet. From the European perspective, it’s a wait and see game. If GBP weakens, it may be worthwhile waiting before buying into the UK market.