Dating back to the post-WWII reconstruction era, the United Kingdom has had a tumultuous relationship with the organisations of Europe. Beginning with a refusal to sign the Treaty of Rome in 1957 and culminating with the 2016 vote for Brexit, various factions in the U.K. have desired to keep mainland Europe at arm's-length.
While working to preserve the global standing of Great Britain, English leaders from Margaret Thatcher to Theresa May have addressed the question of membership to the European Union in detail. At times, the social and economic dialogue surrounding the ongoing relationship has become heated. The Brexit vote and subsequent transition process have illustrated this point on numerous occasions.
The eventual Brexit event will pose many challenges to the viability of the British pound sterling (GBP).
Economic relationships with EU member nations will fundamentally change. In addition, support for a Scottish independence referendum may further shake up the commercial environment in the U.K. Upon the passing of "Brexit Day" on 29 March 2019, the GBP is likely to enter a period of revaluation in response to the shifting geopolitical atmosphere.
England's Role In Brexit
Featuring the largest voting base of any country in the U.K., England was the deciding factor in the outcome of the Brexit vote.
In England alone, more than 15 million ballots were cast for "Leave." The total amounted to almost seven times the number of "Leave" votes in Northern Ireland, Scotland, and Wales combined. The 53.4% to 46.6% tally in England was a margin of almost two million votes, and it ensured the overall passage of the Brexit referendum.
No matter which side of the membership debate sitting British leadership has supported, preservation of the GBP as an autonomous currency has been of paramount importance. After sustaining the shock of Black Wednesday in September 1992, the U.K. abruptly exited the European Monetary System (ERM). Financial historians commonly cite Black Wednesday and England's desire to insulate the GBP as being a root of the U.K.'s Brexit movement.
Brexit Negotiations And Challenges For The GBP
The June 2016 vote for Brexit was the initial step in turning a U.K. secession from the EU a reality. From that time until March 2019, diplomats from both sides were commissioned with the task of outlining acceptable terms for the "divorce." Among others, the key issues for resolution were financial compensation made to the EU, the standing of U.K./EU citizenship rights and securing the Northern Ireland border. In addition, provisions were required to further smooth the post-Brexit transition.
Over the course of the Brexit process, several key events served as stimuli for volatility facing the GBP. As each event came to pass, traders and investors addressed the British pound sterling from many unique vantage points. The result was a spike in participation that fostered considerable pricing fluctuations in the GBP/USD and EUR/GBP.
The following are the primary events of the Brexit proceedings and their subsequent impact upon GBP valuations:
June 2016: Vote For Brexit
The U.K.'s vote for Brexit came as a surprise to political pundits and financial professionals alike.
With uncertainty surrounding eventual U.K. independence as well as the Brexit process itself, the GBP entered a period of extreme market turbulence. In the immediate aftermath of the 23 June 2016 vote, the GBP experienced heavy losses and fell to a 31-year low.
The pain for the GBP continued in the months after, highlighted by a 6% flash crash against the USD in October. Bearish sentiment toward the GBP became a prevailing theme over the next 12 months, with values against the USD losing 15% by June 2017.
March 2017: Article 50 Triggered
Article 50 is a clause in the Lisbon Treaty that defines the procedure for when an EU member nation terminates its affiliation with the union.
In March 2017, U.K. Prime Minister Theresa May "invoked" Article 50, officially beginning the U.K.'s departure from the EU. In the runup to 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.
Upon the decision to invoke Article 50 becoming official, the GBP posted moderate gains against the USD and Euro. Unlike the surprise vote for Brexit, the consensus among analysts suggested that the triggering of Article 50 was already priced into GBP valuations limiting downside volatility.
December 2017: EU/U.K. Divorce Deal Reached
On 8 December 2017, leaders from the EU and U.K. reached an agreement for the coming "divorce."
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 U.K. to the conglomerate. Upon public announcement of a deal being reached, the GBP rallied 0.9% against the USD and more than 1% vs the euro.
A working agreement for an orderly parting of ways between the U.K. and EU was viewed as positive news by currency traders. As much of the ambiguity surrounding the coming Brexit subsided, confidence in the future potential of the GBP returned.
October 2018: Divorce Deal Ratification
In order to secure the final terms of Brexit, the divorce deal must be ratified by several independent voting bodies.
Consenting majorities in both houses of U.K. Parliament as well as the EU council will be necessary. For the deal to be approved, at least 20 nations representing 65% of the union's population must vote in favour of the agreement.
November/December 2018: Crafting A Withdrawal Agreement
Throughout the second half of 2018, the crafting of a withdrawal or "divorce" deal between the EU and U.K. came to the forefront of Brexit proceedings. Following months of negotiations, P.M. Theresa May and the EU Council published a withdrawal agreement on 14 November 2018.
Upon the divorce deal's announcement, U.K. detractors cited that it heavily favoured EU interests. Critiqued aspects of the agreement included an exit from the single market economic structure and adoption of EU guidance on the Irish backstop issue facing Ireland/Northern Ireland.
Shortly after the EU endorsed May's deal on 25 November, opposition began mounting in the U.K. Parliament. Nearly one month later, on 17 December 2018, P.M. May announced that a "meaningful vote" on the agreement was to be held later in the month; eventually, the Parliamentary vote was delayed until January 2019.
January 2019: Rejection Of May's Divorce Deal
On 15 January 2019, the House of Commons officially rejected May's divorce deal by an overwhelming margin. Members voted down the plan by a tally of 432 to 202, the largest such margin against a sitting government in history. However, the vote came as no surprise to forex traders. For the 15 January 2019 session, the GBP lost a modest 0.01% vs the USD while rallying by 0.46% against the euro.
Political fallout from Parliament's denial of the divorce deal proved severe, highlighted led by Labour party leader Jeremy Corbyn tabling a motion of "no confidence" against the U.K. government. Corbyn's submission brought the possibilities of a new Brexit referendum, snap election or delay of the scheduled 29 March 2019 Brexit Day. Ultimately, all three events eventually came to pass over the course of 2019.
March-May 2019: Brexit Delay, Indicative Votes, May Resigns
On the 29 March 2019 Brexit Day, an amended divorce deal put forth by the U.K. government was defeated by a second Parliamentary meaningful vote. Following hours of debate, the House of Commons voted 344 to 286 to reject the government's deal with the EU.
Following the second meaningful vote's outcome, Parliament held a collection of "indicative votes" during the week of 1 April 2019. These motions were designed to bring a House of Commons majority-supported divorce proposal to the table. On the heels of voracious debate, none of the indicative votes gained Parliamentary approval. Subsequently, an emergency EU Summit was held on 10 April 2019, where a Brexit Day extension was granted until 31 October 2019.
Unfortunately for sitting U.K. Prime Minister Theresa May, failure to pass an acceptable EU/U.K. divorce deal led to dwindling political support. In reaction to the strife, May announced resignation as Conservative leader on 24 May 2019. May's departure set the stage for a Conservative Party leadership contest, led by MPs Boris Johnson and Jeremy Hunt.
June 2019-Jan. 2020: Johnson Elected, Brexit Day Delayed, General Election Held
Upon May exiting the Prime Ministership, a six-week Conservative leadership contest was held. Boris Johnson turned out to be the easy victor, securing 66.4% of cast votes. Johnson entered office on promises of delivering Brexit to the people of the U.K. Statements from a 24 June 2019 acceptance speech summed up Johnson's stance toward Brexit: "I will take personal responsibility for the change I want to see...never mind the backstop, the buck stops here."
Johnson's first months as P.M. were filled with controversy, featuring a suspension of Parliament and the 31 October 2019 Brexit Day being postponed until 31 January 2020. Given deep political divisions and growing opposition to Conservative government leadership, Johnson called for a December 2019 snap election. The election was to settle differences and provide a clear path forward for the U.K.'s government.
The result of the snap election was a decisive victory by Johnson over Labour leader Jeremy Corbyn. A Conservative majority ensued over Labour by a count of 364 to 203―the largest such margin since 1987.
The decisive Conservative victory fostered the U.K.'s exit from the EU on 31 January 2020. Dubbed "Brexit Day III," the U.K. finally exited the EU after more than 3.5-year-long debate and leadership upheavals. Accordingly, the Brexit transition period was scheduled to end on 31 December 2020.
Feb. 2020-Sept. 2020: COVID-19, Divorce Deal Amendments Shake Up Brexit Transition
Over the course of the 3.5-year Brexit transition period, unforeseen events regularly injected uncertainty to the process. The largest surprise came in February 2020 with the onset of the coronavirus (COVID-19) pandemic. Humanitarian and financial losses were extreme, as the global economy experienced an unprecedented shutdown.
As the pandemic progressed through the summer of 2020, divorce deal negotiations brought fresh angst to the Brexit saga. With the transition period scheduled to end on 31 December 2020, the GBP experienced months of heightened volatility.
COVID-19, Brexit And The GBP
For the U.K., COVID-19's timing was especially ominous. With the 31 January Brexit Day in the past, the pandemic brought unprecedented economic strife. Following the March global economic shutdown, U.K. GDP plunged 20.4% during April 2020 and 10.4% in the three months leading up to April.
The GBP reacted violently to the onset of COVID-19 and lost extensive marketshare on the forex. For February and March 2020, the GBP/EUR fell by 5.5%, with the GBP/USD coming in 6.1% lower. The swift COVID-19 downturn caused extreme financial and societal uncertainties, culminating with PM Boris Johnson's late-March hospitalisation from the virus.
Debates over the U.K. government's handling of the pandemic raged, illustrating a deep divide on the issue. Early-June polling data suggested that only 41% of Britons approved of the government's management of COVID-19. While not related to Brexit, the low ratings pressured the Johnson-led government even more. The atmosphere prompted chief EU negotiator Michel Barnier to suggest U.K. leadership was committed to undermining ongoing negotiations to regain political favour.
Divorce Deal Negotiations Hit An Impasse
Over the course of late-spring and summer 2020, the U.K. and EU conducted a series of negotiations designed to finalise January's divorce deal. Among the key points were technical amendments to the existing agreement and negotiations regarding the economy of Northern Ireland. Months of remote talks produced little progress, with both sides expressing frustrations on a regular basis.
Tensions heated up in late-June when EU negotiators sought concessions from Britain drafted to protect the single-market system in Northern Ireland. Among the provisions were rules governing plant seeds, the importation of cultural goods, and the monitoring of narcotic components.
The requests were a point of contention, with many in the U.K. suggesting that the EU was attempting to establish a U.K./Northern Ireland "hard trade border." Ultimately, PM Johnson elected to push a bill in Parliament intended to "override" parts of the original divorce deal.
Throughout the negotiations, the GBP performed admirably against many of the forex majors. However, following the chaos of February, March and April, the pound sterling in a mixed performance against the USD and EUR.
- From 1 May 2020 to 1 September 2020, the GBP/USD rallied by 779 pips (6.1%).
- For the same period, GBP/EUR fell by 303 pips (2.6%).
Although the pound performed relatively well, its future strength was in question due to uncertainties facing the British economy, the spread of COVID-19 and Brexit negotiations.
September/October 2020: EU Takes Legal Action Over The IMB
Over the course of spring/summer 2020, U.K. and EU negotiators worked toward finalising the terms of Britain's 31 December withdrawal from the EU. The process proved exceptionally challenging as the onset of the COVID-19 pandemic restricted travel, forcing involved parties to work remotely. Subsequently, amendments to the January 2020 Divorce Deal came slowly and the introduction of the Internal Market Bill (IMB) from U.K. leadership proved problematic.
IMB Gains Approval In The House Of Commons
Promoted by P.M. Johnson and the British government, the IMB was designed to prevent any barriers to domestic trade from arising after the transition period was complete. Upon Britain officially leaving the EU, each member of the U.K. was authorised to adopt its own regulations and policies governing commerce. To ensure uniform standards across the U.K., the IMB proposed three guiding tenets:
- Mutual Recognition: Under the IMB, any goods or services legally marketed in one part of the U.K. may also be sold without restrictions in other regions.
- Non-Discrimination: The IMB renders moot any locally adopted measures aimed at discriminating against goods or services from other regions of the U.K.
- Office For The Internal Market: The Office for the Internal Market is created by the IMB and tasked with monitoring the domestic marketplace. Although it doesn't have any enforcement or regulatory powers, the Office for the Internal Market is able to bring points of concern before Parliament.
Largely a protectionist measure, the IMB was voted upon and passed in the House of Commons on 14 September 2020. In response, the EU Council claimed that the IMB breached international law and violated the previously ratified Divorce Deal. Accordingly, EU leadership issued a "letter of formal notice" on 1 October 2020, following up on earlier commitments to do so. In the letter, the EU gave the U.K. one month to change the IMB or face litigation in the European Court of Justice in Luxembourg.
In response to the fresh Brexit turmoil, the GBP exhibited enhanced volatility. Following the 1 October 2020 EU announcement, the GBP/USD posted a wide daily range of 159 pips, closing the session down 0.22%. The EUR/GBP traded with less vigor on 1 October, generating a 95 pip daily range and rallying by 0.43%.
Controversy over the IMB became prevalent during the early fall of 2020. Opponents stated that it compromised the sovereignty of Northern Ireland and undermined long-standing peace accords. IMB backers made the case that the legislation was necessary to ensure free trade and protect U.K.borders. Below are a two notable quotes on the IMB:
- U.S. Presidential Candidate Joe Biden: "We can't allow the Good Friday Agreement that brought peace to Northern Ireland to become a casualty of Brexit. Any trade deal between the U.S. and U.K. must be contingent upon respect for the Agreement and preventing a hard border."
- U.K. P.M. Boris Johnson: "What we cannot do now is tolerate a situation where our EU counterparts seriously believe that they have the power to break up our country. That illusion must be decently dispatched, and that is why these reserve powers are enshrined in this Bill."
Perhaps the greatest impact of the IMB standoff was that it increased the chances of a "no-deal Brexit." Under such a scenario, the EU and U.K. would end the transition period without a framework in place to govern trade, immigration and any other issues that may arise.
While the implications of a no-deal Brexit remain to be seen, the lack of a formal agreement is estimated to cost the U.K. billions in trade revenue. Analysts project that the U.K. may lose as much as US$16 billion in trade from the EU and experience a significant economic contraction. As a result, the GBP may weaken for an extended period until U.K. international trade stabilises.
Oct. 2020: Uncertainty Grows Ahead Of Brexit Conclusion
Over the course of the four-and-a-half year Brexit transition period, the process took many twists and turns. Negotiations often became contentious, with both U.K. and EU leadership hesitating to compromise. Upon the 15 October 2020 divorce deal deadline passing, uncertainty regarding the future of the relationship peaked.
With the 31 December 2020 Brexit Day approaching, negotiators made last-ditch efforts to revive talks in late-November. Unfortunately, three major sticking points hindered progress:
- Irish Backstop: The EU expressed concerns that the U.K. will amend previous agreements regarding the Northern Ireland/Ireland border.
- Fishing: U.K. interests sought to protect the exclusivity of fishing rights in domestic waters.
- Financial Aid: EU leadership feared that U.K. banking entities would provide financial support to U.K. companies over EU firms. This issue was viewed by the EU as an unjust competitive advantage for the U.K.
Each of these points of contention challenged the ratification of any new divorce deal. In an attempt to rectify the situation, EU chief negotiator Michel Barnier travelled to London for in-person talks over the weekend of 28-30 November 2020.
Going into the conference, both sides appeared motivated. Upon arrival, Barnier stated that he would work with "patience and determination" to craft a compromise. In addition, U.K. PM Boris Johnson stated that "there's a deal there to be done if they want to do it." With an end to Brexit on the immediate horizon, the late-November meeting took on an urgent tone.
Nov. 2020: Negotiations Prompt Choppy Forex Action
In total, November 2020 proved to be an extremely uncertain time on the forex. The U.K. and EU faced dramatic spikes in COVID-19 cases, as well as fallout from the contested U.S. presidential election of 2020. Given these two variables, the future of public health and international commerce remained in question.
Despite the external stimuli, the GBP and EUR each performed relatively well throughout November. Aside from trading tightly against one another, strong monthly rallies were posted against the USD:
- EUR/GBP: The EUR/GBP traded in a constricted range for most of the month. Upon the 30 November market close, the EUR/GBP finished down 42 pips (-0.47%).
- EUR/USD: Values of the EUR/USD grew significantly, spiking by 278 pips (+2.39%) and posting new yearly highs above 1.2000.
- GBP/USD: Like the EUR/USD, forex participants looked kindly upon the GBP/USD during November. For the month, values closed very near yearly highs, up by 371 pips (+2.87%).
Note: Past performance is not an indicator of future results.
A majority of the monthly forex volatility concerning the pound sterling and euro took place early in November. Upon face-to-face U.K./EU negotiations officially resuming, the GBP and EUR initially traded quietly. For the session, speculation regarding the future of Brexit prompted neutral currency market sentiment on Monday, 30 November 2020:
- EUR/GBP: The EUR/GBP traded sideways as forex participants digested the weekend news cycle. Ultimately, the EUR/GBP lost 30 pips (-0.34%) on the session.
- EUR/USD: Forex traders took a moderately negative stance against the EUR/USD. Rates fell by 39 pips (-0.33%) as the greenback rallied vs the euro.
- GBP/USD: The GBP/USD came in flat, losing a modest 12 pips (-0.09%) for the day.
Note: Past performance is not an indicator of future results.
The quiet action of 30 November illustrated the heightened degree of uncertainty facing the transition process. With Brexit Day only a month out, forex participants chose to tread lightly as the fresh round of EU/UK negotiations was conducted.
Dec. 2020: U.K. and EU Agree To Last-Minute Divorce Deal
Although the U.K. officially exited the EU on 23 January 2020, heated negotiations ensued for the following 11 months. Several primary issues, namely fisheries and the Northern Ireland border, hampered progress. With the formal end of the transition period being 31 December 2020, negotiators from both sides felt an increasing pressure to craft a divorce deal ahead of the U.K.'s departure day.
The EU-U.K. Trade and Cooperation Agreement
Following an exhaustive back-and-forth throughout late 2020, the EU and U.K. finally reached an agreement-in-principle on 24 December. Labelled the "EU-U.K. Trade and Cooperation Agreement," the arrangement outlined the future of commerce between the two bodies. The EU-U.K. Trade and Cooperation Agreement was designed to remove ambiguity in three essential areas.
1. Free Trade
The Agreement's parameters dealt largely with governing post-Brexit EU/U.K. trade relations. Lauded as a "new economic and social partnership," the divorce deal dealt with several key facets of trade:
- Tenets governing fisheries, investment, competition, taxes and logistics were introduced.
- Zero tariffs and zero quotas were assigned to goods that complied with the appropriate rules of origin.
- Both parties agreed to promote environmental, climate change, social and labour protections as warranted.
In order to protect the rights of citizens and jurisdictional authorities, the Agreement thoroughly addressed security matters. Below are the key provisions:
- A new framework was established for law enforcement and judicial cooperation.
- Strong coordinated efforts to fight and prosecute cross-border crime and terrorism were to be promoted.
- New operational capabilities were to be built for the management of U.K. responsibilities outside of the Schengen Area.
3. Horizontal Governance
To ensure stability for citizens, businesses and consumers, the Agreement included a chapter on governance. In an attempt to remove uncertainty, several legislative issues were addressed:
- A Joint Partnership Council was established to make sure the Agreement's provisions were enforced properly.
- Uniform dispute resolution procedures were created to preserve individual rights and promote a "level playing field."
- The EU and U.K. can retaliate against one another if the Agreement is violated. Known as "cross-sector retaliation," this provision applies to all facets of the Agreement.
GBP Reacts To Divorce Deal
Upon the Trade and Cooperation Agreement being ratified, both U.K. and EU leadership lauded the deal as being a significant diplomatic achievement. European Commission President Ursula von der Leyen took a positive view of the Agreement
"It was worth fighting for this deal because we now have a fair and balanced agreement with the U.K., which will protect our European interests, ensure fair competition, and provide much needed predictability for our fishing communities."
Shortly after the House of Lords passed a bill supporting the Agreement (521 to 73) on 30 December, U.K. Prime Minister Boris Johnson said the following:
"11 PM on 31 December marks a new beginning in our country's history and a new relationship with the EU as their biggest ally. This moment is finally upon us and now is the time to seize it."
However, not all parties involved were pleased with the divorce deal. Aside from complaints from the U.K. fishing industry, Scotland's First Minister Nicola Sturgeon condemned Brexit as a whole:
"Brexit is happening against Scotland's will and there is no deal that will ever make up for what Brexit takes away from us."
Even though approval of the Trade and Cooperation Agreement was surrounded by controversy, the British pound reacted positively. For the week of 28 December 2020 to 1 January 2021, the GBP showed resilience versus the majors:
- GBP/USD: The pound rallied consistently versus the USD, posting a 125 pip (+0.92%) weekly gain.
- EUR/GBP: Against the euro, the pound performed well to finish 2020. For the final week of the year, the EUR/GBP fell by 53 pips (-0.60%).
- GBP/CHF: The GBP/CHF showed modest bullish participation, rallying 35 pips (+0.29%) ahead of New Year's Day 2021.
- GBP/JPY: Versus the Japanese yen, the pound showed strength. For the final week of 2020, the GBP/JPY rose by 73 pips (+0.52%).
Note: Past performance is not an indicator of future results.
Upon the Trade and Cooperation Agreement's adoption, the GBP exhibited short-term strength against the global majors. However, the long-term implications of Brexit and the divorce deal remained to be seen. Ultimately, the pound's forex standing would be a product of U.K. economic performance, Bank of England (BoE) monetary policy and ongoing foreign relations with the EU.
GBP Volatility And The Implementation Period
Throughout the Brexit process, the GBP has faced periodic volatility in conjunction with important events. In order to limit the economic fallout on both sides following Brexit Day, guidelines for an orderly transition have been put into place.
Known as the "implementation period," the 21 months between 29 March 2019 and 31 December 2020 were meant to act as a buffer against economic and social chaos. The plan for this period included several provisions designed to smooth the changeover:
- EU/U.K. citizens will enjoy the same rights and immigration status as before Brexit.
- The U.K. will be able to sign and ratify its own treaties.
- Existing trade deals between the U.K. and other countries will be honoured.
- U.K. will remain a part of the Common Fisheries Policy.
To avoid a hard border with the Republic of Ireland, Northern Ireland will stay in parts of the single market and customs union.
Many view the implementation period as simply being an extension of U.K. membership in the EU. However, the ability for the U.K. to negotiate its own treaties opens the door for new economic partnerships. This sentiment was echoed by the GBP shortly after the Brexit transition deal being announced. Significant rallies against the euro (+0.51%) and USD (+0.61%) were observed after the agreement became public in March 2018.
However, the GBP struggled to sustain marketshare 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% versus the USD and greater than 6% compared to the euro.
The Brexit process has posed many unforeseen challenges to the British pound sterling, and enhanced periodic volatilities have been observed surrounding key diplomatic and political events. From the massive losses taken in the hours after the surprise vote for Brexit, to a gradual recovery due to subsiding uncertainty, the GBP has undergone numerous fundamental transformations.
While the ultimate end to the Brexit saga remains to be seen, many currency market participants are promoting an optimistic tone toward the GBP.
Following a strong 2017 where the GBP gained 9.5% against the USD and 4.3% against the euro, investors were reassured of the pound's global standing.
Of course, economic growth in the U.K. and Bank of England (BOE) monetary policy decisions will ultimately determine the GBP's value in a post-Brexit Europe.
This article was last updated on 21st January 2021.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…