Brexit and The Pounds

Brexit
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The History                              

Brexit was a word barely heard till 2012 but rose to prominence and became a politically defining term in 2016. This term is a blend of two words “Britain” and “exit” which represents Britain’s exit from the European Union. Visionary leaders came together to create economic and political stability to ensure long term peace in Europe. 

The EU had a total of 28 European member states, including the UK. From then on, many others have followed in their footsteps, striving to build on this vision through successive treaties. In 1957, France, West Germany, Belgium, Italy, Luxembourg, and the Netherlands signed the Treaty of Rome, which established the European Economic Community (EEC), the predecessor of today’s European Union. 

The Treaty of Maastricht signed on February 7, 1992, established the European Union (EU) based on three pillars: the European Communities, the Common Foreign and Security Policy (CFSP), and the Police and Judicial Cooperation in Criminal Matters (JHA). It introduced the concept of European citizenship, enhanced the powers of the European Parliament and launched the economic and monetary union (EMU). The Treaty of Nice, signed in 2001, streamlined the institutional system in a bid to maintain efficiency. The UK finally made it into the club in 1973, but just two years later was on the verge of backing out again.

In 1975, the nation held a referendum on the question: “Do you think the UK should stay in the European Community (Common Market)?” The 67 percent “Yes” vote included most of the UK’s 68 administrative counties, regions and Northern Ireland. In contrast, only Shetland and the Western Isles voted “No.” The center-left Labour Party split over the issue, with the pro-Europe wing splitting from the rest of the party to form the Social Democratic Party (SDP).

Tensions between the EEC and the UK exploded in 1984 when the Conservative Prime Minister Margaret Thatcher talked tough in order to reduce British payments to the EEC budget. In October 2016, Prime Minister Theresa May announced her intention to invoke Article 50 of the Treaty on the European Union, formally giving notice of Britain’s intent to leave the EU. In the vote of June 23, 2016, The UK voted to leave the EU by 52% to 48%. Leave won the majority of votes in England and Wales, while every council in Scotland saw Remain majorities. On March 29, 2017, the order, signed by May was delivered to the Council of the European Union, officially starting the two-year countdown to Britain’s EU departure, set for March 30, 2019.

 

GBP’s (Great Britain Pound) roller coaster ride on Brexit

Brexit and The Pounds

The economic relationship of Britain with the world was sure to take a different turn as it decided to leave the European Union. The boat of Brexit has posed many unforeseen challenges to the pound. Enhanced periodic volatilities have inevitably surrounded vital diplomatic and political events not just in the UK, but almost the entire European continent Let us witness the journey of pound through the Brexit years: –

  1. JUNE 2016: BREXIT VOTE

The vote was undoubtedly an iffy prospect for political leaders and parties, economists and financial professionals. The aftermath of the March 2016 vote resulted in a tumultuous position of pound in the market. GBP experienced heavy losses and fell to a 31-year low. It continued to fall against its major standard competitor dollar in the coming months. It fell to 6% against USD in October 2016, and by June 2017 it had plummeted to a 12% low. That means the pound which was earlier worth 1.32 euros had fallen to a lowly 1.11 Euros by the October following the vote.

  1. MARCH 2017: ARTICLE 50 IN PLAY

Because of the March 2017 triggering of Article 50, the GBP experienced considerable pressure after a Parliamentary vote cleared the way for May’s declaration. In the hours after Parliament rendered its decision, the GBP rapidly fell 0.7% against the USD.

  1. DECEMBER 2017: EU/U.K. DIVORCE DEALS

On December 8, 2017, leaders from the EU and UK reached an agreement for the coming “divorce” or separation.

The deal outlined provisions for the Northern Ireland border, EU/U.K. citizenship and a financial settlement of £39 billion to be paid by the UK to the EU. Upon public announcement of a deal, the GBP rallied 0.9% against the USD and more than 1% vs the euro. 

While some were apprehensive of the future of the pound, some people and organizations viewed this in the positive light. Analysts at Goldman Sachs said that the pound was still a profitable investment. Currency traders were also optimistic about the divorce move. The dubious atmosphere persisted, but GBP restored some of the trust, its potential in the global market soared again.

  1. JANUARY 2019: REJECTION OF THERESA MAY’S DIVORCE DEAL

On January 15, 2019, the House of Commons officially rejected May’s divorce deal by an overwhelming margin. However, the vote came as no surprise to forex traders. For January 15, 2019, session, the GBP lost a modest 0.01% vs the USD while climbing by 0.46% against the euro.

There were possibilities of a new Brexit referendum, snap election or delay of the scheduled March 29, 2019, Brexit Day.

  1. THE IMPLEMENTATION PERIOD

The “implementation period”, was the period of 21 months between March 29, 2019, and December 31, 2020. Many see the implementation period as merely being an extension of UK membership in the EU. However, the ability of the UK to negotiate its treaties opens the door for new economic partnerships. The GBP echoed this sentiment shortly after the Brexit transition deal’s announcement. Significant rallies against the euro (+0.51%) and USD (+0.61%) occurred after the agreement became public in March 2018. 

However, the GBP struggled to sustain market-share throughout the tumult of 2018. For the year, the GBP lost 1.8% against the USD and 1.1% vs the euro. Nonetheless, the pound sterling rebounded in 2019 against the majors. During 2019, the GBP gained more than 4% and 6% versus the USD the euro respectively.

THE PRESENT AND THE FUTURE

There has been a diverse division of people of what holds for the UK economic future. People of the United Kingdom feel that leaving EU has saved the nation from various anomalies of the organisation like:

  • The corruption in the EU
  • Regional Separatist mentality in the number of member states
  • Anti-Democratic nature of EU

Experts say that leaving the EU might be the right decision in the long run. However, it leads to tensed relations with Ireland, losses for both, importers and of course, fall of the pound.

Brexit and The Pounds

Being a part of the EU gave Britain a myriad benefits. However, its exit has put doubt in the mind of investors and businesses across the world. The UK was one of the politically most influential countries of the total of 28 countries. As it has withdrawn, there is speculation that Germany might rise to power and dominate the organization.

The bigger question which arises now is how Britain withdraws from the European Union, whether it will go for Hard Brexit (sharp deal to cut off ties with no trade and projects continued) or Soft Brexit (agreement on specific policies). 

The coronavirus pandemic has already severely hit finances all over the world and the UK has taken one of the biggest hits by its GDP plummeting by 20.4%. It is undoubtedly a critical time for policy-makers and citizens all over the UK as their calculated risks and visions today will either save or destroy, once a valiant colony as the British empire.

If the UK fails to strike a deal with the EU by the current end date of the transition period, i.e., December 31, 2020 – and the period unextended – then the country would leave with no deal and revert to WTO rules on trade and security – which would have a direct impact on the pound.

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