Unless you have been living underground for the last 12 months, then you may be aware that on the 23rd June 2016, the United Kingdom held a referendum to leave the European Union.
After months of interminable campaigning from both sides of the issue, 51.89% of the country voted to leave the EU. The fallout from this decision has been monumental and, while there has been little progress on the departure since the referendum, there is almost daily debate regarding how the decision will affect the country and whether it was a good or bad move.
Whatever side of the argument that you land on, there are certain issues that have been raised by experts in the financial field that are significantly concerning to all.
The last 12 months of negotiations with the European Union has seen a surprising sturdiness of the Great British Pound (GBP). While the currency fell ominously during the week that the Brexit results were announced, it has since shown true resilience against the euro and the US dollar.
It seems that traders are not willing to put their necks on the line just yet and are awaiting the conclusion of negotiations, rather than dismissing the power of the GBP now.
However, most money experts believe that the Pound will eventually decline, once the Leave vote is pushed through.
UniCredit Bank stated that they believe the market is “under-pricing political and economic risks” and are advising people that the GBP is set to depreciate at some point, especially against the euro.
What has clouded the situation even further is the result of the snap election that Prime Minister Teresa May called in April. When this was announced, experts predicted a landslide and foreign-exchange markets backed the GBP, in anticipation of a strong government and subsequently, a smooth Brexit.
However, May’s plan backfired and, while she still remains as the Prime Minister, the Conservative underperformed immeasurably and are now trying to agree a power sharing deal with the DUP of Northern Ireland.
Some experts believe that this disastrous election means that the GBP is still being held in too higher regard and the seemingly fractured government could mean really tough Brexit negotiations and a bum deal for the UK. This would all subsequently mean disaster for the GBP, which would plummet to all-time lows following a bad post-Brexit deal.
However, some financial analysts believe the fact that the GBP is still holding up despite all of the political calamity of recent months, bodes well for its future.
A strategy note from UBS suggests that the GBP could actually appreciate; “I feel on the political front a lot of negative to GBP is price by now and I see continued headline risk for calls for a soft Brexit which should help sterling eventually grind back higher, my preference is to express this view through short EUR/GBP.”
However, while this statement paints a picture of an immediately appreciating currency, experts actually believe that appreciation is some considerable time away, especially with the current climate in the United Kingdom’s politics.
“After political uncertainty in the United Kingdom starts to dissipate, there is the chance that sterling depreciation could eventually be reversed.” A slightly more sombre outlook from across the pond tells you that internal outlook looks perhaps more rose-tinted than the international communities outlook.
Bill McNamara, a market technician, explains that appreciation isn’t a pipedream, certainly when compared to the euro; “It is worth noting that it (sterling) rebounded off the lows last week relative to the euro, implying that there might now be some support at around 1.13. However, that price action is still somewhat inconclusive and the outlook remains unclear. Resistance is now at around 1.1460.”
In layman’s terms, this indicates that the GBP has hit some recent lows but is expected to climb in relation the euro.
The most recent sign of the GBP’s weakness came last month when, following the release of a speech by Governor of the Bank of England Mark Carney, the currency fell against the euro, US dollar and others.
In the speech, Carney explained that the Bank would not be raising interest rates, due to the current socio-political climate in the United Kingdom. "From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment”.
Head of Dealing, Godi Financial