The surprise outcome of the 2016 United Kingdom Brexit Referendum sent valuations of the British pound sterling (GBP) into chaos. Upon the final vote tally coming in at 51.9% for "leave" to 48.1% for "remain," the voting public showed its support of the U.K. withdrawing from the European Union (EU). The aftermath of the Brexit vote made it clear that a new era for both the U.K. and GBP had officially started.
A majority of the financial community believed a vote in favour of Brexit was improbable at best. The position was not unfounded, with the final electoral results showing that much of the U.K. supported ongoing membership in the EU:
- England: Leave (53.4%), Remain (46.6%)
- Northern Ireland: Leave (44.2%), Remain (55.8%)
- Scotland: Leave (38%), Remain (62%)
- Wales: Leave (52.5%), Remain (47.5%)
Fueled by concerns over fair trade, immigration and national security, England proved to be the deciding factor in the U.K.'s exit from the EU. Boasting the largest portion of the U.K.'s electorate, England's edge of 1.9 million votes was the primary reason the "leave" option prevailed.
Surrounded by political and economic uncertainty, currency markets facing the GBP reacted negatively to the idea of a fully autonomous U.K. Pricing volatility reached dangerous levels for the pound sterling, and values fell more than 10% in the hours after the vote was made final.
This currency market fallout marked the beginning of a tumultuous period for the GBP. Unique challenges have presented themselves throughout the process of the U.K. formally exiting the EU. From the Article 50 enactment of the Lisbon Treaty to a pending Scottish Independence Referendum, the transition following Brexit has brought the future status of the GBP into question.
The Beginning Of The Brexit Transition: Enactment Of Article 50
Article 50 of the Lisbon Treaty is the section of EU law that outlines the process for a member state to formally exit the union. Article 50 includes five specific provisions:
- Any Member State may decide to withdraw from the Union.
- Upon the Member State notifying the Union of its intention, an agreement shall be negotiated between the State and Union. It will specify arrangements for the State's withdrawal and future relationship with the Union.
- Agreed upon Treaties between State and Union will cease to apply two years after date of entry into the withdrawal agreement unless extended through unanimous consent of Member States.
- The Member State shall not participate in the discussions of the European Council.
- A State may ask to rejoin the Union, subject to the procedure in Article 49.
In November 2016, a legal challenge halted the triggering of Article 50, citing the need for a Parliamentary vote to first be conducted. The challenge was upheld, prompting an instant 1.2% gain in the GBP against the United States dollar (USD). The market's optimism over the U.K. potentially staying in the EU lasted for several months until spring 2017.
In March 2017, Parliament voted to pass the Article 50 bill, which effectively cleared the way for invocating said article. Upon Parliament's decision hitting the news wires, the GBP dove more than 0.7% against the USD. The falling GBP was a product of renewed scepticism over the future of U.K. economic prowess and procedural uncertainty surrounding the Brexit transition process.
Article 50 was officially invoked by British Prime Minister Theresa May on 29 March 2017. When May's signed letter was received by the European Council, the two-year window for transition negotiations commenced. In the immediate aftermath of Article 50 being triggered, the GBP fell 0.3% against the USD, extending post-Brexit Referendum losses to 17.5%.
Executing The Transition: The Divorce Bill
Reaching a deal between the U.K. and EU regarding the actual conditions of withdrawal is a multifaceted endeavour. Ongoing financial obligations, the preservation of existing trade relationships and the Ireland/North Ireland border are a few items integral to the discussion.
Transition dealings officially began in November 2017 with the negotiation of the "divorce bill" between the U.K. and EU The divorce bill outlined a cash settlement to be paid by the U.K. in compensation for its share of existing EU spending commitments. Payments are to be made over time and are estimated at 13% of the total EU budget, upwards of £50 billion.
While some view the payment as unreasonable, economists argue that the divorce bill will actually save money in the long run. The cost of a "Hard Brexit," one with no transition deal, may cost the U.K. as much as £190 billion in economic fallout by 2030.
In the immediate aftermath of the divorce bill being announced, the GBP rallied 0.6% against the USD, reaching two month highs. The price action illustrated a common theme throughout the Brexit process: any elimination of uncertainty acted as a catalyst for gains in the pound sterling.
A Deal For Transition
On 19 March 2018, officials announced a deal governing the two-year implementation period following Britain's scheduled exit from the EU. Led by chief negotiators Michel Barnier and David Davis, the deal put to rest many of the questions surrounding completion of the Brexit process.
The transition period, or implementation phase, is set to officially begin 29 March 2019 and last until 31 December 2020. This 21-month period is meant to provide affected industries and governmental agencies adequate time to make the necessary preparations for a smooth transition. Upon its completion, permanent guidelines for future EU/U.K. relations are to be put into place.
In addition, the agreement for implementation contains several key elements designed to promote a seamless transition for the U.K.'s exit:
- The U.K. will be able to unilaterally negotiate and ratify its own trade deals during this period.
- The U.K. will still be subject to existing EU trade deals until 31 December 2020.
- EU citizens immigrating to the U.K. will be given the same rights during the transition period.
- The U.K. will receive fishing rights, but will not be able to enact new fisheries policy until 31 December 2020.
- Northern Ireland will remain in the single market and customs union to avoid a "hard border" with the Republic of Ireland.
The deal for transition is a significant step in preserving long-term U.K./EU relations. While the issues of fishing rights and the Northern Ireland border are points of contention, a majority of the economic concerns over the Brexit transition are addressed thoroughly.
Upon news of the agreement being made public, the GBP rallied considerably against the USD and euro (EUR). In the trading session following the announcement, the GBP gained 0.7% against the euro and 0.9% vs the USD. Citing an increased probability of tightening monetary policy from the Bank of England (BoE), several institutional investors raised long-term projections for the pound sterling. In turn, bullish sentiment toward the GBP crept into the marketplace.
Tumult And Surprise: Resignations Within The U.K. Brexit Transition Team
Amid tense negotiations, several leading proponents of Brexit abruptly resigned their positions on the U.K. transition team. Within a 24 hour period beginning 8 July 2018, Brexit Secretary David Davis and U.K. Foreign Minister Boris Johnson each took their leave of the process. In addition, Steve Baker, one of Davis' deputy ministers, also tendered resignation. As a result, uncertainty grew facing the GBP and terms of the U.K. leaving the EU.
One of the primary reasons for the departures was a disagreement with U.K. Prime Minister Theresa May regarding the extent of concessions to be made during ongoing negotiations. Citing terms outlined in the Chequers memo as being "too soft" toward the preservation of U.K. interests, both Johnson and Davis elected to tender their resignations. Several items outlined in the Chequers memo are credited with undermining Johnson and Davis' desire to achieve a hard Brexit:
- Creation of a combined customs territory between the EU and U.K.
- U.K. obligation to police the traffic of goods to the EU and apply EU tariffs where applicable.
- Both sides were to abide by a common rulebook for all goods flowing between the EU and U.K.
- Assorted matters were to be handled by a "joint institutional framework."
In his resignation letter, Johnson referred to the Chequers memo as being a "semi-Brexit" and that it put the U.K. on a path to "colony status."
The sudden resignations undermined the fluidity of the Brexit process and political stability of U.K. leadership. Subsequently, the chances of a Conservative party vote of "no confidence" facing Prime Minister Theresa May increased. Also, talk of a potential snap election for the Prime Minister seat also gained steam ahead of the March 2019 U.K. departure date.
The impact that each resignation had on the pound sterling was substantial. In the case of David Davis, the GBP experienced moderately positive volatility. In the hours after his stepping down became official, the GBP rallied 0.6% against the USD and 0.3% vs the Euro.
Optimism toward the GBP proved fleeting as reports of Boris Johnson's withdrawal flooded newswires hours later. Gains made in the wake of the Davis resignation were promptly given back, with the GBP falling 0.3% against the USD and Euro respectively. Due to the timing of Johnson's abdication, the pound ended the forex session on a down note.
At their core, the departures of Davis and Johnson signalled upheaval on the U.K. side of the Brexit transition process. With the odds of a formal challenge to Theresa May's leadership growing, the GBP experienced increased volatility due to the market's perception of political risk. In fact, many currency analysts predicted a massive depreciation in the pound sterling in the event a turnover in leadership were to occur.
While the Brexit process continued to move forward amid the shakeup in transition leadership, ambiguity regarding previously negotiated terms plagued the stability of the GBP.
Deal Or No Deal?
The process of the U.K. departing the EU technically began with the enactment of Article 50. However, reaching a formal agreement regarding the terms of withdrawal proved to be a painstaking task. As a fierce debate over economics and an Ireland/Northern Ireland border ensued, resignations and missed deadlines became a regular part of the dynamic. The meeting at Salzberg illustrated the degree of political conflict present in negotiations and the pound sterling's sensitivity to each development.
During 2016, then-U.K. Home Secretary Theresa May took a nuanced public stance on the issue of Brexit, while privately lauding the benefits of Britain remaining in the EU. When May was appointed Prime Minister on 13 July 2016, hard-line "Brexiteers" began to voice concerns that her leadership was likely detrimental to the crafting of an acceptable withdrawal. Upon the initial October 2018 deadline for a deal passing, an official challenge to May's leadership became a popular notion among the Tory party in Britain. As negotiations with the EU moved forward, a growing movement for a Tory vote of "no confidence" began to gain steam.
A late-October announcement of a tentative U.K./EU Brexit finance deal reinforced May's stumbling leadership. The deal was said to prevent a hard border with Northern Ireland as well as to give London basic access to EU financial markets. This was particularly important to the markets, as more than 37% of Europe's financial assets are managed in London and worth €6.82 trillion.
Subsequently, the GBP experienced strong bullish short-term volatility. Forex traders took the news as a sign that a final Brexit deal was imminent and bid the pound sterling higher against the U.S. dollar and euro. Following the 31 October breaking news, the GBP performed well through the 1 November close against the USD and EUR.
Past Performance is not an indicator of future results.
Even though the EU/U.K. financial deal was not officially approved by Parliament or the EU Commission, the announcement suggested that avoiding a hard Brexit remained possible. With concern surrounding the future of May's leadership and a no-deal Brexit subsiding, the GBP showed strength as optimistic sentiment dominated forex participation.
Fallout From Salzburg: A "No Deal" Brexit Becomes A Possibility
The summit at Salzburg, Austria in September 2018 proved to be a turning point in the Brexit transition process. Prime Minister May sat down with leaders from the European Council to discuss a final Brexit agreement in an informal capacity.
U.K. interests sought to preserve as much sovereignty as possible, while EU representatives aimed to ensure ideal trade and border considerations for their group of 27 remaining nations. When the meeting concluded, Salzburg turned out to be a contentious gathering and one that brought the possibility of a "no deal" Brexit to the forefront.
Essentially, a "no deal" Brexit refers to the U.K. leaving the EU abruptly on 29 March 2019 without any sort of transitionary period or further negotiations. The impact of a no deal Brexit on U.K./EU relations is multifold and potentially dramatic:
- The previously outlined 21-month transition period for amendments to existing trade deals and laws, or fresh negotiations, is to be eliminated.
- A contested border between Ireland and Northern Ireland may become a reality. The EU bloc could apply pressure to Northern Ireland to enforce customs policies and immigration checks.
- U.K. citizens living in the EU, as well as EU citizens living in the U.K., would have no legal status.
- Without a formal deal, the U.K./EU trade relationship, including tariffs, would fall under jurisdiction of the World Trade Organisation (WTO).
At Salzburg, Theresa May promoted her plan for Brexit, known as the "Chequers" plan. It was based on three priorities: protecting Northern Ireland's standing within the U.K., preserving trade relations with the EU and maintaining security ties with the EU.
May's proposal did not gain traction among the European Council and faced heavy scrutiny from conservative Brexit supporters within the U.K. When taken together, the opposition signalled that a no deal Brexit may become a real possibility.
The fallout from Salzburg hit the GBP hard. As news of a riff over a hard Northern Ireland/Ireland border between May and the European Council became public, forex traders began to limit exposure to the pound. Rapid losses of 0.1% against the USD and euro ensued as the headlines out of Austria suggested that a no deal Brexit was gaining traction.
Further losses by the GBP were experienced as European Council leaders publicly dismissed May's plan following the meeting. Citing economic concerns that Chequers "undermined the single market," European Council President Donald Tusk's call for the plan to be reworked brought about an immediate 0.4% drop for the GBP against the USD.
For the GBP, news of a no-deal Brexit proved to be detrimental to positive market sentiment. The potentially negative economic impact and uncertainty surrounding the future of U.K. trade unhinged currency investors. The developments at Salzburg brought the underlying angst surrounding a unilateral U.K. withdrawal from the EU to the forefront of GBP valuations.
More U.K. Resignations, Brexit Summit In Brussels
Upon the October 2018 deadline for a U.K./EU withdrawal agreement passing without a formalised deal in place, terms of the pending Brexit transition became a hotly debated issue. Deep fractures from within U.K. leadership began to emerge, as another round of high-level resignations came to fruition during mid-November 2018.
In addition to the governmental turnover, P.M. May's official Brexit proposal drew harsh criticisms from hard-line Brexiteers and Tory party opposition. With negotiators eager to solidify the transition, the Brexit Summit at Brussels scheduled for 23-25 November gained added importance.
The GBP experienced extreme weakness following the sudden resignations of two senior U.K. cabinet members. On 15 November 2018, Brexit Secretary Dominic Raab and Pensions Secretary Esther McVey exited their posts citing differences with May's proposal for the U.K.'s withdrawal.
As stated in a letter of resignation penned by McVey, "We have gone from no deal is better than a bad deal, to any deal is better than no deal." Similar comments were echoed by Raab, publicly stating that he "could not in good conscience" support May's plan. The tone of comments from each resignee gave currency traders and investors reason for concern over the future of the U.K. economy. Also, they alluded to growing opposition to May's leadership from within the Tory party.
The resignations injected fresh political uncertainty to the Brexit transition, prompting a rapid selloff in the GBP. Within an hour of Raab's decision becoming public, the GBP fell 2% against the USD.
Similar action was observed against the euro and Swiss franc for the 15 November 2018 session. Values of the GBP/EUR fell by 1.85%, while the GBP/CHF posted losses of 1.60%. The bearish sentiment toward the GBP following this round of resignations proved more severe than that of the abrupt July 2018 departures of then-Brexit Secretary David Davis and U.K. Foreign Minister Boris Johnson.
The political turmoil in the U.K. was put on hold going into a scheduled U.K./EU Brexit Summit for 23-25 November 2018 in Brussels. At the summit, May's plan for Brexit was submitted to the EU council for approval. Following a one-hour discussion, the council formalised support for the withdrawal agreement with all 27 member nations signing on.
In the lead up to Brussels, enhanced volatility once again struck the GBP. Daily trading ranges for the GBP/USD on 22-23 November became extended. Although exchange rates did not trend directionally, session ranges of 150 and 95 pips were observed.
For the same period, the GBP/EUR exhibited similar volatility. Ultimately, the GBP gained more than 80 pips against the EUR over the 48-hour stretch, a signal that forex participants were optimistic toward the U.K. in regards to the outcome of the summit. As in Salzburg two months previous, the summit at Brussels brought fresh Brexit uncertainty and proved to be a primary catalyst for exchange rate volatility facing the pound.
May's Brexit Plan Hits A Roadblock, Confidence Vote Called
In late November 2018, May enjoyed a breakthrough with EU negotiators and an agreement for a conditional Brexit. The deal included parameters governing union efforts, trade, investment, the provision of financial services and protection of digital property. Upon the plan being approved unanimously on 25 November by the EU Council, an approval vote in the British Parliament was scheduled for 11 December 2018.
In the lead up to the Parliamentary vote on May's deal, the GBP experienced significant volatility. Uncertainty surrounded the deal's approval and whether or not the plan was to garner enough support among British Members of Parliament (MPs) to pass. Facing considerable pressure to gain unified Conservative party backing, May publicly stated that the agreement was "the best available" and if lawmakers rejected it Brexit negotiations would effectively "go back to square one."
Despite May's efforts to promote the plan, lagging support became obvious as the 11 December date approached. Rumours of a pending vote delay began to surface in early December, prompting angst in forex valuations of the GBP. These sentiments reached a crescendo on Friday, 7 December. Forex participants drove values of the GBP lower, posting session losses against the USD (-0.39%) and EUR (-0.55%).
On the following Monday, 10 December 2018, May officially announced a delay to the vote on her plan for Brexit. Publicly stating that "if we went ahead and held the vote tomorrow, the deal would be rejected by a significant margin," May postponed Parliamentary action on her plan until an unspecified future date. The GBP experienced immediate bearish pressure in the aftermath of the announcement, as observed by large negative sessions against the EUR and USD. For the trading day of 10 December 2018, the GBP lost 1% against the EUR and 1.14% vs the USD.
Upon Parliament's decision regarding May's Brexit plan being delayed, a movement for her removal as Conservative party chief gained momentum. Led by opposition head Jeremy Corbyn, a "confidence vote" was quickly scheduled for 12 December 2018. In apprehension of the forthcoming confidence vote, the GBP extended the losses of the previous two days against the USD (-0.58%) and EUR (-0.23%) for the 11 December forex session. Following a contentious pre-vote exchange between May and Corbyn, May secured party leadership, winning confidence by a final tally of 200-117.
The vote's outcome guaranteed that May's position as PM could not be challenged by Conservative opposition again for 12 months. This fact greatly reduced the uncertainty facing the U.K. government and appeared to bring stability to Brexit proceedings. As a result, the GBP rallied on the news, posting a positive 12 December 2018 forex session across the majors. Gains versus the USD (+1.10% ), EUR (+0.65%) and Japanese yen (+0.99%) highlighted the trading day, fostering newfound positive sentiment toward the British pound sterling.
A Parliamentary Vote On May's Deal, Labour Move For No Confidence
On 15 January 2019, about one month after being initially delayed, Parliament conducted an official vote on May's Brexit deal. Having already secured the support of the European Council, the plan needed to gain Parliamentary approval before being sent back to the EU for final ratification. Members of Parliament voted overwhelmingly against the plan with a final tally of 432 "against" and 202 "for."
The 15 January session proved to be a challenging one for the GBP, as high degrees of participation and volatility were the norm against the forex majors. With the 29 March 2019 departure date rapidly approaching, uncertainty dominated exchange rate valuations of the pound. Wide daily ranges, robust volatility and whipsaw trading conditions challenged short-term currency traders throughout the session.
Past Performance is not an indicator of future results.
As a result of the staggering defeat suffered by May's Brexit deal, Labour party leader Jeremy Corbyn tabled a move of no-confidence against the sitting government. Arguing that May's "zombie administration" had lost the right to govern, Corbyn called for its immediate removal via Parliamentary vote. Following a period of open debate, the vote of no-confidence was scheduled for 16 January 2019. Upon the vote being completed, May emerged victorious by a slim margin of 325-306.
Over the course of the no-confidence vote, the GBP remained relatively quiet. Short-term volatility levels were low and intrasession ranges tight. Following the heavy action of 15 January, currency traders chose to wait out the proceedings instead of jumping into the market with both feet. Daily ranges tightened up dramatically amid the muted action.
Upon May's plan failing to secure Parliamentary approval, the entire Brexit transition process entered a state of flux. Several scenarios became possible including:
- amending May's deal,
- holding a second public referendum,
- postponing the 29 March 2019 Brexit Day, or
- exiting the EU without a deal in place.
No matter which course of action U.K. leadership pursues, the GBP is likely sure to experience turbulence moving forward.
U.K./EU Divorce Date Delayed
For the greater part of three years, the final day that the U.K. was set to remain a member of the EU was 29 March 2019. Upon arrival of that date, a deal was to be in place governing the departure and future relationship between the two bodies. In step with the chaotic tone of the Brexit transition process, the planned divorce day was postponed amid deep parliamentary division.
On 14 March 2019—just 15 days ahead of the scheduled divorce date—U.K. Parliament voted overwhelmingly (For: 413 Against: 202) to request an extension to Article 50. Citing concerns over the lack of a clear path forward, British MPs elected to delay the U.K.'s exit from the EU until at least 30 June 2019.
In addition to seeking an extension of Article 50, Parliament denied a motion to hold a second Brexit referendum by a wide margin (For: 85 Against: 334). In the agreement, the EU Council stated that upon 12 April coming to pass, the U.K. will either need to either:
- abide by May's plan,
- come up with a new proposal, or
- exit the union without a deal in place.
Parliament Takes Control Of The Transition
On 25 March 2019, Parliament passed an unprecedented measure allowing them to hold "indicative votes" on a collection of motions designed to customise the U.K.'s departure. Upon the indicative votes being held on 27 March, eight motions were voted on and most were denied by substantial margins.
In contrast to previous Parliamentary votes, the GBP traded in tight ranges across the majors for the 27 March forex session. Modest losses vs the USD and EUR highlighted the trading day for the GBP as investors elected to limit risk during the historic indicative votes.
Simultaneous to the Parliamentary actions of 27 March, May attempted to secure support for her Brexit deal by offering to step down as leader of the U.K.'s Conservative party. In a surprise announcement, May stated the following:
"I have heard very clearly the mood of the Parliamentary party. I know there is a desire for a new approach, and new leadership in the second phase of Brexit negotiations. I won't stand in the way of that."
May's offer of resignation did not include an exact date for her stepping down as P.M. Nonetheless, it did generate immediate support from those in the opposition to her plan, including past critic Boris Johnson. In the event May's Brexit deal garners Parliamentary approval, the divorce date would be extended from 12 April 2019 to 22 May 2019, as outlined by the EU Council.
U.K./EU Divorce Date Postponed Again
On 10 April 2019, the European Council granted the U.K. a "flexible extension" to Article 50 proceedings. The six-month addendum effectively set the new deadline for Brexit as 31 October 2019.
The key driver of Brexit day being moved was a lack of consensus within the U.K. government. May's agreement-in-principle with the European Council, as well as several rounds of indicative votes, did not gain U.K. Parliamentary approval. Political issues such as the Irish backstop, the EU single market economic system, and immigration policy were left ambiguous. With no clear path forward, U.K. and EU leadership agreed that a six-month delay of the final divorce date was a viable option.
When the initial Brexit Day of 29 March 2019 passed and the 12 April deadline rapidly approached without a deal in place, EU Council President Donald Tusk announced this new divorce date on 10 April. He pleaded with U.K. leadership, "Please do not waste this time," and then publicly outlined provisions included by the extension agreement :
- Passage Of A Brexit Deal: Any passage of an existing or new Brexit deal could result in an immediate U.K. exit from the EU.
- A Second Referendum: The extension opened the door for a second Brexit referendum, even though similar measures were voted down during Parliament's indicative votes.
- Revoke Article 50: The U.K. was free to cancel Brexit proceedings at any time.
- U.K. Remains A Member Of The EU: Until the 31 October 2019 deadline, the U.K. was to remain a member of the EU. As a matter of procedure, this provision required U.K. participation in the May 2019 EU Parliamentary Elections. If the U.K. chose not to participate, a revision of Brexit Day to 1 June 2019 was mandated.
While initially seeking a shorter delay, May excepted the 31 October date put forth by Tusk and the European Council. After the agreement became public, she issued comments regarding the extension via Twitter:
"The choices we now face are stark and the timetable is clear. So we must now press on at pace with our efforts to reach a consensus on a deal that is in the national interest."
Given the expanded timetable for the U.K.'s departure from the EU, volatility facing the GBP on the forex subsided. For the week of 8 April to 12 April 2019, trading ranges were tight and performance was mixed for the GBP against the majors:
- GBP/USD: Gain of 0.25% (range of 111 pips)
- GBP/EUR: Loss of 0.56% (range of 93 pips)
- GBP/CHF: Gain of 0.50% (range of 141 pips)
- GBP/JPY: Gain of 0.53% (range of 223 pips)
- GBP/NZD: Loss of 0.16% (range of 142 pips)
- GBP/AUD: Loss of 0.70% (range of 224 pips)
- GBP/CAD: Loss of 0.15% (range of 184 pips)
Past Performance is not an indicator of future results.
While the "flexible extension" gave U.K. leadership time to craft a solution to the Brexit quagmire, the final outcome of the transition process remained a mystery. Several options were on the table, ranging from immediate exit via compromise deal to a second referendum being held. Although viewed by many as a necessary step, the postponement of the 12 April deadline answered few questions about how the U.K. will actually exit the EU.
Theresa May Resigns As U.K. Prime Minister, EU Elections Held
On 24 May 2019, U.K. Prime Minister Theresa May resigned from her post as head of the Conservative party in Britain. Following a tumultuous period of negotiations and a Parliamentary rejection of her revised Brexit deal, she relinquished the Prime Minister seat effective 7 June 2019.
Citing the need for compromise in the transition process, May spoke directly to the public in an emotional address: "It is and will always remain a matter of deep regret to me that I have not been able to deliver Brexit." Shortly after her announcement, Labour party and opposition leader Jeremy Corbyn responded on Twitter: "Theresa May is right to resign. She's now accepted what the country's known for months: she can't govern, and nor can her divided party."
May vacating the prime ministership illustrated a deep divide in the U.K. government regarding how to proceed with the Brexit transition. Tory party candidates quickly sought her replacement as the Conservative head, led by Boris Johnson, Michael Gove, Jeremy Hunt, Dominic Raab and Sajid Javid. The election proceedings were to last upwards of a month, with the winner being determined through several rounds of Parliamentary votes.
Due to chaos stemming from Parliament's failure to pass a new divorce deal and May's resignation, the pound sterling lost considerable value on the forex. Exchange rates fluctuated wildly across the majors throughout the first three weeks of May. Ultimately, the GBP posted significant losses from 6 May to 24 May 2019:
- GBP/USD: During this period, the USD experienced large gains against the pound sterling, with the GBP/USD falling by 435 pips (- 3.3%).
- EUR/GBP: Amid the fallout, pound sterling values decreased consistently against the euro. As a result, the EUR/GBP rallied by 316 pips (+ 3.7%).
- GBP/CHF: One product of the U.K. political uncertainty was a pronounced spike in the value of safe-haven currencies. Over the three weeks, the GBP/CHF plunged by 618 pips (-4.6%) as currency traders actively limited risk exposure to the pound sterling.
Somewhat overshadowed by the shake up in U.K. leadership, the EU held its regularly scheduled Parliamentary elections from 23 May to 26 May 2019. More than 50% of European voters cast ballots, registering an 8% gain from levels seen in 2014 (42.61%). The turnout was the highest witnessed in more than 20 years.
The massive levels of voter participation indicated significant public interest and resulted in a shifting political dynamic. For the first time in decades, centrist organisations the European People's Party (EPP) and the Progressive Alliance of Socialists and Democrats (S&D) lost majority control (43%) of the EU Parliament. This came to pass as far-right and far-left political parties gained 70 seats, compromising the EPP and S&D majority.
In the immediate aftermath of the EU elections, currency traders continued to favour other global majors over the GBP. On 27 May 2019, the pound sterling continued the monthly bearish trend and posted several moderate losses:
- GBP/USD: The GBP/USD slid by 31 pips, a loss of -0.25%.
- EUR/GBP: A modest rally of 14 pips (+0.16%) was posted by the EUR/GBP.
- GBP/CHF: Currency traders favoured the Swiss franc slightly, with the GBP/CHF falling by 3 pips (-0.03%) for the session.
Ultimately, the political unrest in the U.K. and rebalancing of power in the EU Parliament brought more uncertainty to the Brexit transition. As the 31 October 2019 final divorce date approaches, questions surrounding a potential "deal" or "no-deal" Brexit brought enhanced volatility to trade of the GBP.
Past Performance is not an indicator of future results.
Transition Of Power In The U.K.
Following the 7 June 2019 resignation of Theresa May, the selection process of the next U.K. Prime Minister officially began. Initially, a dozen candidates declared their intent to run for the prime ministership and lead Britain through the final stages of the Brexit transition. Several rounds of preliminary voting from members of Parliament rapidly narrowed the field to two: former foreign secretary Boris Johnson and acting foreign secretary Jeremy Hunt.
Various differences defined the two finalists, particularly their personal backgrounds. However, both did serve as foreign secretary under May and were eager to deliver the U.K.'s delayed departure from the European Union. Each commented publicly on the importance of completing the Brexit transition ahead of the 31 October divorce date no matter the terms:
- Boris Johnson: "No one sensible would aim exclusively for a no-deal outcome. No one responsible would take no-deal off the table."
- Jeremy Hunt: "If we faced a general election before delivering Brexit, we [Conservatives] would be wiped out as a party. And that is something that we must not think about doing even for one second."
Upon completion of a month-long tour of the U.K. campaigning for support as P.M., a final postal vote was held. The 160,000 registered Conservative party members returned their ballots for official tally on 22 July 2019. Johnson proved victorious over Hunt by almost a 2/1 margin (92,153 to 46,656).
Widely viewed as a leading Brexiteer, Johnson took an aggressive stance toward delivering the U.K.'s departure from the EU. In his first speech as P.M., Johnson directly addressed the issue:
"We are going to get Brexit done on 31 October and take advantage of all the opportunities it will bring with a new spirit of can do."
Labour party leader Jeremy Corbyn took a hard-line stance against the new P.M. by publicly stating the following: "People do not trust this prime minister to make the right choices for the majority of people in this country when he's also promising tax giveaways to the richest of big business."
In the spirit of change, Johnson ushered in dramatic changes to U.K. leadership. Seventeen members of May's cabinet were either fired or tendered their resignations. Several outspoken proponents of Brexit—Sajid Javid, Dominic Raab and Priti Patel—were appointed to the new cabinet in key roles. With the next U.K. general election scheduled for 2022 at the earliest (barring a snap election), opposition to Johnson's handling of the final stages of the Brexit transition was to remain largely vocal.
As to be expected, the pound sterling exhibited periods of extreme volatility throughout the roughly six-week electoral cycle. From May's resignation on 7 June to Johnson's election win on 23 July, the GBP lost almost 2% vs the USD and 0.9% against the EUR.
While the GBP's performance was far from positive during this period, it was not the only eurozone currency to struggle in comparison to the USD. Over the same span, the euro lost 1.09% versus the USD, highlighted by a steep three-session bearish trend from 19-23 July during the immediate runup to the election's decision.
Brexit Uncertainty Reaches A Crescendo
With a little under eight weeks until the U.K.'s divorce from the E.U., political tensions reached a fevered pitch in the United Kingdom. In the shadow of the rapidly approaching Brexit Day of 31 October 2019, early September brought several key political events. They included a lost majority in Parliament as well as numerous votes concerning Brexit policy and national leadership. The charged news cycle produced heavy volatility for the GBP as each headline prompted fresh uncertainty.
Conservatives Lose Majority
On the evening of 3 September 2019, a group of British MPs voted to take control of Parliament's agenda, ceasing the sitting government's ability to dictate Brexit policy. The motion came on the heels of a surprise Conservative party defection from Phillip Lee earlier in the day. In his prepared remarks, Lee stated: "This Conservative government is aggressively pursuing a damaging Brexit in unprincipled ways. It is putting lives and livelihoods at risk unnecessarily and it is wantonly endangering the integrity of the U.K."
Lee's decision to shift alliances to the Labour party brought a firm challenge to the Conservative majority. Later, during the evening of 3 September, Parliament voted in favour of seizing the agenda of official business by a tally of 328 to 321. In response to the lost parliamentary majority and shift of agenda, the GBP rallied a modest 0.15% against the euro and gained 0.20% vs the USD.
The fallout from Lee's defection and Parliament's vote was substantial. Conservative Prime Minister Boris Johnson immediately sprung into action, leading a motion to kick the 21 Conservative MPs who voted to seize the agenda out of the party.
Citing an ominous situation, Johnson commented publicly on the Conservative party purge: "Let there be no doubt about the consequences of the vote tonight. It means Parliament is on the brink of wrecking any deal we might be able to strike in Brussels."
Parliament's Attempt To Block A No-Deal Brexit
In the hours that followed the Conservative party shakeup, Parliament tabled a bill designed to block the U.K. from exiting the EU without a divorce deal in place. If passed, the new "Brexit delay bill" was to send Johnson to the mid-October EU Summit with orders to craft a new deal or seek a Brexit Day extension until January 2020.
As a countermeasure, Johnson proposed a parliamentary vote to hold an early-October snap election. The request was immediately contested by opposition Labor party leader Jeremy Corbyn via Twitter:
"When No Deal is off the table, once and for all, we should go back to the people in a public vote or a General Election to decide our country's future."
Amid the pending vote for the Brexit delay bill and Johnson's call for a 15 October election, the pound sterling showed periods of extreme volatility. Upon the Brexit delay bill passing its first round of voting and the snap election being denied by Parliament MPs, currency traders showed optimism toward the GBP. For the 4 September 2019 forex session, the GBP/USD rallied 1.40% and the GBP/EUR gained 0.83%.
The positive sentiment towards the pound sterling continued during the 5 September session. As the prospect of a no-deal Brexit appeared to be decreasing, the GBP continued its march north against the USD and EUR. Session gains upwards of 0.5% against each extended the GBP's early-September bull run.
Snap Election Denied, Parliament Suspended
For the U.K. government, the second week of September picked up where the first week left off with more votes and a rare "prorogation" of Parliament. However, amid the chaos, the GBP weathered the storm, preserving the gains posted on the 4th and 5th of September.
8 September 2019 brought another challenge for a snap election by the prime minister. After failing to secure support in a previous vote, Parliament scrutinised a second call for a 15 October general election. Upon the final vote being counted, the early election was once again denied. It needed 434 votes to pass, but the final tally came in at 293 For and 46 Against, with 303 abstaining.
In the aftermath of the failed snap election vote, the pound sterling experienced heavy participation but held its value versus the majors. For the Monday, 9 September session, the GBP/USD closed in the vicinity of the previous week's highs near 1.2350. The GBP/EUR behaved in much the same fashion, settling the session within a few pips of the 5 September high of 1.1177.
On the heels of the snap election's failure to garner necessary support, the Conservative government officially suspended Parliament until 14 October 2019. Upon taking the action, P.M. Johnson pronounced the following: "I will go to that crucial summit on October the 17th and no matter how many devices this Parliament invents to tie my hands, I will strive to get an agreement in the national interest. This government will not delay Brexit any further."
Ultimately, the GBP exhibited enhanced intraday price action following Parliament's suspension. Nonetheless, exchange rates settled the 9 September 2019 session up modestly versus the USD and EUR. While the political uncertainty did increase volatility, the lessened chances of a no-deal Brexit favoured the GBP throughout the first half of September 2019.
Past Performance is not an indicator of future results.
The E.U. And U.K. Craft A Final "Withdrawal Agreement"
The day of 17 October 2019 brought a historic breakthrough in the Brexit process. After more than three years of negotiations, British and eurozone leadership crafted an agreement in principle governing Brexit. Although the deal still required final passage from both the U.K. Parliament and EU Council, tremendous optimism surrounded its guiding tenets. Acting U.K. P.M. Boris Johnson lauded the achievement via Twitter:
"We've got a great new deal that takes back control ― now Parliament should get Brexit done on Saturday so we can move on to other priorities like the cost of living, the NHS, violent crime and our environment."
In addition to Johnson's proclamation, European Commission President Jean-Claude Juncker issued positive sentiments on Twitter:
"Where there is a will, there is a deal ― we have one! It's a fair and balanced agreement for the EU and UK and it is a testament to our commitment to finding solutions."
Upon the withdrawal agreement being reached, chief EU-Brexit negotiator Michel Barnier publicly stated the deal was the "result of an intense negotiation" and that the two sides "delivered together." Barnier's statement was instructive of several compromises made to evolve the existing dialogue between the two sides. The new deal includes a few key differences from former P.M. Theresa May's early 2019 proposal, most of which applied to the "Irish Backstop" controversy:
- Northern Ireland will be part of the U.K. customs territory, not the EU customs region.
- Northern Ireland will remain subject to a collection of EU rules, specifically on agricultural products.
- The Northern Ireland assembly must provide "democratic consent" to continue with the deal four years from December 2020.
- Products from Northern Ireland can be labeled "from the United Kingdom."
- The United Kingdom will collect a value-added tax from Northern Ireland.
- A working group for both sides will be commissioned with ongoing oversight of Northern Ireland's trade situation.
The EU Council granted its immediate approval of the new divorce deal at its Summit on 17 October. While there remained several regulatory hurdles, including final ratification from the EU Council and U.K. Parliament, forex traders took a positive view of the GBP. Values of the pound rose substantially against the majors for the 17 October session:
- GBP/USD: Values spiked 167 pips before setting the session up by 0.49%. In the days that followed, exchange rates exceeded 1.3000, a level last traded in May 2019.
- GBP/EUR: The GBP extended weekly gains vs the EUR before closing the day near flat. Intraday highs exceeded 1.1645, a six-month high.
- GBP/CHF: A firm rally against the safe-haven Swiss franc was quickly muted as investors hedged against uncertainty regarding forthcoming Parliamentary votes. For 17 October, the GBP lost 0.21% versus the CHF.
U.K. Passage Of The Withdrawal Agreement Bill (WAB)
While the crafting of a divorce deal was a monumental achievement for leadership, there remained several hurdles to its adoption. Among them were the agreement's final passage through official votes by the EU Council and U.K. Parliament.
Parliament was the first to act, passing the Withdrawal Agreement Bill (WAB) on its second reading in the House of Commons. The vote was conducted on 22 October 2019 and came in 329 to 299 "in favour of." However, in a subsequent vote addressing the deal's timeframe, Johnson's 31 October launch date was denied by Parliament, 322 to 308 "against."
As a result of Parliament's votes, the Brexit process was once again at a stalemate. Although the WAB did garner approval, MPs actively sought an extension through January 2020. Forex traders were skeptical of the proceedings, choosing to take a cautious stance toward the GBP in the wake of WAB and the likely delay of its implementation. From the Monday 21 October 2019 open until 22 October close, volatility toward the pound was modest:
- GBP/USD: The GBP ticked higher vs the USD after news of the WAB passage became public. For the 48-hours surrounding Parliament's actions, the GBP/USD lost 77 pips, the majority of which occurred post-vote.
- GBP/EUR: Largely rotational trade was the rule for this period, with rates falling 28 pips.
- GBP/CHF: As some of the uncertainty surrounding the future of Brexit resided, so did participation in safe-haven currencies. For the two-day period, the GBP gained a meager 17 pips versus the Swiss franc amid quiet trading conditions.
The days following Parliament's WAB passage and denial of its proposed timeline proved to be politically charged. With Parliament demanding that the sitting P.M. request an extension from EU leadership, Johnson elected to "pause" his Brexit legislation and considered calling for a snap-General U.K. Election. With the Brexit Day rapidly approaching on 31 October 2019, a conclusion to the Brexit transition process remained unclear.
Brexit Deadline Extended
October 2019 proved to be an active period on the Brexit news front. As the 31 October exit date rapidly approached and the Withdrawal Agreement Bill (WAB) was put into place, the prospects of a no-deal Brexit appeared to be off the table. However, upon Parliament rejecting P.M. Boris Johnson's plans to "fast track" the WAB on 22 October, the Brexit process was once again shrouded in uncertainty.
As a result of the WAB's timeline not gaining approval, there was a movement for a formal Brexit extension. As stated by Labour party head Jeremy Corbyn, MPs "must have the necessary time to improve on this worse-than-terrible treaty."
Following the rejected WAB timeline, Johnson drafted a letter to EU leadership asking for an extension to the 31 October Brexit Day per British law. The result was a unanimous 27-0 vote from the EU Council extending the deadline until 31 January 2020.
On 28 October, a Twitter statement from EU Council President Donald Tusk announced the Brexit Day extension, dubbed the "flextension," to the world:
"The EU27 has agreed that it will accept the UK's request for a Brexit flextension until 31 January 2020. The decision is expected to be formalised through a written procedure."
U.K. General Election Announced
Following the announcement, political chaos ensued in the U.K. Citing frustrations with the new 31 January 2020 leave date, Johnson ramped up his calls for a 12 December 2019 snap election. "There is only one way to get Brexit done in the face of this unrelenting parliamentary obstructionism ― that is to refresh this Parliament and give the people a choice," Johnson said. His called needed 434 MPs to vote in favour of, but a parliamentary motion garnered only 299.
The next day, 29 October, Parliament voted in favour of a 12 December 2019 snap election by a tally of 438-20. Given the proximity of the Brexit extension and December snap election announcements, a bit of pressure was relieved from the pound. Subsequently, the GBP posted a solid forex trading week for 28 October to 1 November:
- GBP/USD: The GBP gained ground on the USD, rallying 111 pips (+0.87%).
- GBP/EUR: Against its EU counterpart, the pound edged only slightly higher. A five-session gain of 11 pips (0.10%) illustrated uncertain forex sentiment toward the futures of both the EUR and GBP.
- GBP/JPY: Exchange rates vs the Japanese yen edged moderately higher, rallying 57 pips (+0.41%).
- GBP/CHF: Weekly performance versus the Swiss franc came in flat. Currency traders of the GBP/CHF viewed the Brexit extension as being of limited importance, sending rates down by a meagre 1 pip for the week.
Tight daily ranges were the rule in the five sessions following announcements of the Brexit extension and snap election. Although the immediate uncertainty of a 31 October no-deal Brexit was eliminated, forex traders continued to take a cautious view of the pound sterling. Given the unpredictable nature of the 12 December snap election, forex participants assumed a noncommittal stance toward the future of U.K./EU relations.
As a general rule, markets are not fond of uncertainty. The 2016 vote in favour of Brexit created high levels of investor angst regarding the GBP, comparable only to the immediate aftermath of WWII or Black Wednesday. Subsequently, the transition process has been a rollercoaster ride for valuations of the pound sterling.
Here are examples of the forex price action facing the GBP amid the key events of the Brexit transition:
- During the vote for Brexit, the GBP lost 10.0% versus the USD.
- When the Transition Deal was announced, the GBP gained 0.9% against the USD.
While these events and others certainly influenced the pound sterling's pricing across the forex, the unexpected resignations of U.K. leadership did as well. The departures of Davis and Johnson intensified uncertainty regarding the prospects of a hard or soft Brexit. As a result, the GBP experienced significant short-term volatility as the U.K. dealt with surprise turnover in the Brexit transition team.
The initial shock of the Brexit vote was extreme. GBP valuations plummeted as the future of the U.K. came into question. As time passed and details surrounding the U.K.'s withdrawal were hammered out, many concerns began to fade. In the 18 months following the Brexit vote, the GBP/USD hit 1.4000, a 50% recovery of the Brexit crash. However, performance against the euro remained depressed, as values hovered near post-Brexit bottoms.
The U.K.'s future is a subject of debate among economists. The ability to craft its own trade deals amid a global economic resurgence is frequently cited as a potential driver of prosperity. Conversely, uncertainty pertaining to the fishing industry and possible Scottish independence are looked upon as negative factors that may hinder economic performance. Ultimately, only time will tell whether the U.K.'s economic growth and subsequent BoE policy will drive the value of the GBP higher.
This article was last updated on 12th November 2019.