Has Brexit Permanently Damaged The Pound’s Reputation?

Years of uncertainty, confusion, and distress stemming from the 2016 Brexit vote has yet to settle despite the official separation taking place at the end of 2020. Supporters of the “leave” side continue to argue economic growth will accelerate as London is no longer bound by the shackles and bureaucracy from Brussels

On the other side of the debate, the “remainers” believe that even a list minute deal to preserve a zero-tariff and zero-quota access to the European Union and its 450 million consumers doesn’t go far enough. They argue the economic fallout from Brexit is already here and will accumulate over the years.

The thing about economic debates is both sides have plenty of ammunition. The two sides have plenty of data points to choose from (and many more to ignore) to support their narrative. Foreign exchange rates on the other hand have already picked a winning side.

Based on historical data and expectations for GBP EUR Forward rates, the foreign exchange market is declaring remainers are on the right side of the economic debate. The pound and by default London lost the trust of global investors as a global investment hub that can offer superior returns.

GBP EUR Exchange Rate Favors The Euro

The 10-year GBP EUR exchange rate chart makes it abundantly clear which side has all the momentum. The pound’s 10-year high versus the euro was just shy of 1.45 in 2015 yet despite high-expectations of a remain victory, the GBP EUR dipped to around 1.3 in the days leading into the 2016 Brexit vote.

And we all know what happened next. A surprise victory for the leave side led to an immediate 6% decline in the pound against the euro once all the votes were tallied. This was followed up with more weakness over the coming months and years.

Occasional bursts of momentum from 2016 onward were met with selling pressure. The pound couldn’t catch a break and the GBP EUR exchange rate in the post-Brexit world bottomed at 1.0681 on March 23, 2020. The pair ended the year not far removed from its lows at around 1.1

Technical analysts, or experts that study charts to identify trading patterns, likely agree a rebound in the pound shouldn’t be expected any time soon. A return to its prior 2015 highs seems out of the question in the near-term. Expectations for a return back to its all-time high of 1.752 is likely unrealistic.

Wasn’t Brexit Supposed To Lift The Pound?

Joe Tuckey, a currency analyst at Argentex, was quoted as saying in late October 2020 that “Sterling buying has emerged on the merest hint of progress as traders keep their ear to the ground for any signs of a breakthrough.”

The analyst modeled that a finalized trade deal could lift the GBP EUR pair to 1.25 or more. This would have been considered a major development for the pound as it ever so briefly traded above 1.20 in late 2019 and again in early 2020.

The last time the GBP EUR traded above 1.20 for more than a few days was after the post-Brexit plunge in 2016. So, expectations for the pound to trade at the highest level in several years amid the COVID-19 pandemic naturally caught investor’s attention.

As remain supporters would have predicted, the pound didn’t live up to its expectations — despite UK Prime Minister Boris Johnson securing a last-minute trade deal with his EU counterparts.

The pound did however rally to the 1.14 level versus the euro by February 2021 in a move that shouldn’t be celebrated as any signs of momentum. In essence, the GBP EUR exchange rate returned back to where it traded between April and May of last year.

Perhaps the pound’s one last chance to show signs of recovery and attract global investors was lost — and Brexit, whether deserved or not, will take the blame.

Will The Pound Fall In 2021 Or Beyond?

The British pound’s multi-year weakness versus the euro is now into year four and there is little reason to believe a recovery is imminent. There isn’t enough positive news to support upside in the GBP EUR pair. Quite the opposite holds true.

The pound lost 0.6% in value versus the euro based on the Bank of England’s surprise announcement in late 2020 it is studying the impact of negative interest rates. By February the likelihood of negative rates remains fresh on everyone’s mind and an overhang that would likely put an end to any brief momentum in the pound.

And then there is the COVID-19 pandemic that remains months, if not years away from resolving. As large or as small as it may be, the economic fallout from the global health crisis will have less of an impact on the economy compared to Brexit. These were the words of the BoE’s interest-rate setter Michael Saunders.

He said: “Businesses will shake off the effect of COVID-19 as they’re temporary, but the long-term effects of Brexit could be more permanent.”

Talk about a message a senior ranking BoE official likely doesn’t want to deliver: Brexit would negatively impact the economy (and by default the pound) decades from now when COVID is a very distant memory.

Unfortunately to the global investment community, the message received is that the pound and the United Kingdom aren’t open for business like it once was.