Brexit and the Pound – What Happened

23rd June 2016 is a day that Europe and indeed the rest of the world will not forget. That Thursday was when Britain went to vote on the referendum to determine whether it will stay in the European Union or exit it. The vote happened and the result is history: Britain voted to leave the EU, Brexit became a reality, and the world went into shock. The shock was experienced by the common man in the form of news bytes for media consumption. For the financial world the fallout was a nightmare.

The announcement that Britain had voted to leave the EU caused a market meltdown of epic proportions. It fell steeply to the depths, the lowest levels, since the financial crisis of 1985. The night the referendum came through the Pound actually went into free fall, an abysmal plunge that saw it go down 11 percent against the US Dollar. That fall is the single largest fall the Pound has been subjected to in the whole of modern history, in fact the biggest plunge since World War II – from $1.48 against the US Dollar to a low $1.32.4

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The fall that the Pound endured didn’t end there; it went down another 3% over the weekend. It was drastic enough for Chancellor of the Exchequer George Osborne to issue a statement acknowledging the fall but also stating bravely that the financial powerhouses within the UK were all set and ready to be able to cope with it and withstand any adverse pressure it could cause on the local markets. Of course that was not of much help; the Pound has ever since been on a rollercoaster from hell. The result has been drastic: a flash crash and also numerous wild swings in its value.

There was more of the downswing for the Pound as Prime Minister Theresa May announced in October last that the official move to go out of the EU would commence as early as March 2017. The Prime Minister activated Article 50 and that day too saw fluctuations in the fortune of the Pound, dropping a bit and then recovering to make slight gains as it sought to claw its way back up. On that day the Pound traded at around $1.2410, a slim recovery given that it had earlier fallen below $1.24.

Before we proceed let us take a look at what Article 50 is. Article 50 is effectively Article 50 of the Lisbon Treaty. All of 250 words or 5 paragraphs long, this Article lays down the procedure to be followed should a member country of the European Union want to leave it voluntarily. From the way the text is drafted one gets the idea that no one probably thought at that time that someone would actually want to invoke this Article in reality; there is not much there really with the start being ‘Any member state may decide to withdraw from the union in accordance with its own constitutional requirements’.

Among all the vagueness within Article 50 is one detail that stands out as an element that is measurable – a timeframe. The Article states that negotiators would have 2 years from the date of notification of the article within which to wind up all new arrangements.

Coming back to how the Pound is coping with the situation and expected to fare, with Brexit as the backdrop. On 28th March 2017 British Prime Minister writes officially and invokes Article 50 in a letter to European Council President Donald Tusk. This is supposed to be the official step to get the process of separation from the EU started. The immediate result is a slight drop in the value of the Pound, effectively a small drop with high volatility through the day.

A survey conducted by Reuters on 60 banks and research houses showed that while there may be fluctuations in the Pound with respect to the triggering of Article 50, it would not be anything drastic and definitely nowhere like the steep plunges from the previous year at the time of the referendum results. At the same time, the survey also made another thing clear: there would not be much by way of a significant recovery, either.

There may have been something of a bouncing back for the Pound in the first quarter of the year 2017; at least that is what a 1.56% rise would suggest. There was a slight upward trend a little later as well, with the sudden announcement of general elections by Theresa May; that saw the Pound climb up by 2.7% to $1.2905. By June, however, the Pound was back to trading at approximately $1.27 on the dollar.

But now, exactly one year down the road things seem to be back to where they were. The Pound is still falling – as of last week, it was still down against both the US Dollar and the Euro: a 0.6% fall against the Dollar to be at a little lower than $1.35 and 0.8% down against the Euro to close at €1.1275. But this is all along expected lines. As of 30th August 2017, the Pound had again fallen down to 1.075 against the Euro, finally recovering a bit to end the day at 1.079, completely in sync with the third round of Brexit related talks between Chief EU Negotiator Michael Barnier and Britain’s David Davis.

Bloomberg Markets and Finance

The one factor that will definitely influence how the Pound fares is whether the Brexit itself would be a hard one or a soft one. A hard Brexit would definitely raise the possibility of further steep declines in the Pound’s value; a soft Brexit on the other hand may increase the possibility of a recovery for the currency. Whether that recovery will be of substantial proportions is what one needs to wait and watch out for.

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