The historic election season of 2016 brought many surprises and plentiful uncertainty to the world of international business and politics. Beginning with the United Kingdom's Brexit referendum in June 2016, and culminating with the victory of Donald J. Trump in the United States presidential election in November of the same year, a period of unprecedented volatility faced the British pound sterling (GBP).
Economic Interrelationship: United States And United Kingdom
Dating back to the colonial period in the Americas, preceding the official recognition of the U.S. as a sovereign nation, the U.S. and U.K. have maintained an extensive economic relationship. Over the course of modern history, the trade of goods and services between the two has fostered economic growth and political cooperation.
As of June 2017, both the U.K. and U.S. are among the global elite in economic development, ranking 10th and 3rd annually in terms of gross domestic product (GDP). In addition, each nation is a world leader in the importation and exportation of goods and services with foreign partners, ranking in the top 10 in both categories.
The U.K. and U.S. are intertwined in the realm of foreign trade and investiture, conducting considerable business with one another. Listed below are several examples of the extent of economic interrelationship:
- The U.K. ships 14.6% of all exports to the U.S., the single largest destination of British goods and services.
- The U.K. brings in 9.2% of all imports from the U.S., the third largest total behind Germany and China.
- The U.K. and U.S. have the world's largest bilateral investment relationship, US$1.1 trillion in combined foreign direct investment (FDI) for 2013.
- The U.S. is the U.K.'s largest foreign investor, measuring US$24 billion for 2013.
- Over 7500 U.S. companies conduct operations within the U.K., while 42,000 export goods and services directly to the U.K.
- Affiliates of each nation employ over 1 million people in the other. 
The dynamics of the modern trade partnership between the U.S. and the U.K. are a bit one sided in terms of the degree of economic dependence. While the U.S. is the top destination for U.K. exports, the U.K. accounts for only 1.4% of aggregate U.S. exports. This total lags behind eurozone counterparts France and Germany, and places an added importance on a continued U.S. "pro trade" economic policy towards the U.K.
Uncertainty Facing The GBP: The Brexit Effect
Amidst the rapidly changing political environment of 2016, the British pound struggled to find solid footing. The U.K.'s Brexit vote paved the way for an eventual succession from the European Union (EU), creating vast uncertainty regarding the future economic relationship between the U.K. and the rest of the world. As a result, the value of the GBP became a topic of ferocious debate.
The immediate fallout from Brexit was dramatic. On election day (24 June 2016), the GBP suffered its greatest one day devaluation in history, posting 31 year lows. The exhibition of weakness by the GBP was nearly unprecedented, with the only comparison in the modern era being the collapse experienced on "Black Wednesday" in 1992.
The subsequent days and weeks post-Brexit did not provide any relief for what is historically one of the world's most sought after and reliable currencies. From immediate pre-Brexit levels in June 2016 to the close of the first trading day in October 2016, the pound lost 17% of its value against the United States dollar (USD) and 13% against the euro (EUR). The sustained pressure led many to question the long-term prospects of the GBP remaining in the top tier of the global currency hierarchy.
The U.S. General Election Of 2016: Surprise And Uncertainty
At a time when the atmosphere surrounding the pound sterling was best described as toxic, the fiercely contested U.S. general election of 2016 was moving towards a conclusion. The race pitted Republican nominee and businessman Donald J. Trump against the Democratic nominee and former U.S. Secretary of State Hillary Clinton. Polling data in the runup to the election was nearly unanimous in favor of Clinton, with The New York Times projecting an 85% chance of her winning the presidency as late as the afternoon of election day.
With the outcome of the election seemingly a foregone conclusion, global currency market participants patiently awaited the official decision. In the pre-election trading sessions of 7 and 8 November 2016, the GBP appeared relatively stable, trading calmly within the bottom third of yearly ranges against the USD and EUR.
However, as returns streamed in from across the U.S. during the late evening hours of 8 November, the prospects of a Hillary Clinton victory made the transition from certain to questionable. After intense media scrutiny of the voting data, at 2:30 AM Eastern Standard Time on 9 November, the Associated Press officially called the U.S. presidential race of 2016 in favour of Republican candidate Donald Trump.
Upon the confirmation of Trump's election as the 45th U.S. president, short-term volatilities spiked across the entirety of the global currency market. Upon the turbulence eventually subsiding, the GBP stood as a beneficiary of the election's result, having posted positive gains against the seven other major international currencies. From the forex daily close on the election's eve of 7 November, to the close on 9 November, 2016, the GBP gained solid footing against the world's majors:
|Product||Election Day (-1) 7/11/16||Election Day (+1) 9/11/16||Change (pips)|
During the immediate trading session after Trump's upset victory, extreme volatility became commonplace throughout the financial markets of the world. Equities were particularly hit hard: the Japanese Nikkei 225 plunged 5.4%; Hong Kong's Hang Seng index lost 3.2%; and S&P futures for the Dow Jones Industrial Average (DJIA) were halted for trading after losing 4% of its value.
Initially, traditional safe havens such as gold and U.S. Treasury bonds fared extremely well in the face of the unforeseen result. But as time moved forward, financial markets around the world proved resilient and volatility stabilised.
The First 100 Days Of The Trump Administration And The GBP
Still reeling from the uncertainty created by the U.K.'s surprise Brexit vote, the GBP's future seemed unpredictable in the midst of another political upset. As the results of the U.S. general election were disseminated, many currency traders and investors sought traditional safe havens for the intermediate term. As a result, the GBP posted immediate gains against the world's major currencies, jumpstarting talk of the pound's recovery.
The following table illustrates the exchange rate valuations of the GBP in comparison to the top seven global currencies from election day, to inauguration day and through the first 100 days of the Trump presidency. The major pairing of the GBP and USD, as well as the minor pairings of the GBP and euro (EUR), Swiss franc (CHF), Australian dollar (AUD), Canadian dollar (CAD), Japanese yen (JPY) and New Zealand dollar (NZD) are used as illustrations of the pound's relative value vs the currencies of the world's leading economies.
Each exchange rate is the price at session close on the specified date:
|Product||Election Day 8/11/16||Inauguration Day 20/1/17||100 Days 28/4/17|
Since election day to the completion of the first 100 days of the Trump presidency, the GBP has exhibited much-needed strength. While the reclassification of the GBP as a modern safe haven asset is a hotly debated topic in the post-Brexit currency trading environment, the gains are welcomed for backers of the pound sterling.
Below is the GBP's appreciation during this period:
|Product||Gain (pips)||% Gain|
As with most things in the financial arena, the determinants behind the rally of the GBP remain a point of contention. Many technical analysts view the uptick in the pound's pricing as a normal retracement from the lows created in the wake of Brexit. Others maintain that the perceived strength is relative only to currencies outside of the USD, where gains have been slight and trading has gravitated towards lower bound levels established in 1985. Still, many have credited the increase in value of the GBP as an indication of forthcoming economic growth resulting from the election of a pro-business U.S. president.
No matter which point of view is more palatable, it is likely that the changes in the geopolitical atmosphere in the U.K. and U.S. over the course of the 2016 election cycle had an overbearing impact upon the GBP's valuation. While popular opinion towards the future of the pound sterling falls somewhere between optimism and despair, the effect of U.S./U.K. political relations and the potential for a "hard" or "soft" Brexit will be major factors influencing its valuation for years to come.
The Trump Doctrine: Future Impact Upon The British Pound
It is still very early on in the Trump era of U.S. government (as of this writing), but several pending elements of the administration's agenda will likely have considerable implications regarding the GBP. As time moves forward and it brings the potential fulfillment of campaign promises pertaining to the U.S.'s renegotiation or exit from trade deals, withdrawal from existing treaties, and broader economic policy, it will be much easier to quantify the impact that President Trump has had upon the GBP.
However, a few issues have been put forth by the Trump administration that have the potential to greatly evolve U.S.-U.K. relations and the basic fundamentals facing the GBP:
- Elimination of U.S. Participation in TTIP: The Transatlantic Trade and Investment Partnership (TTIP) is a bilateral agreement that focuses on bolstering trade through a reduction of regulations facing the exchange of goods and services between the EU and the U.S. President Trump has been a vocal opponent of TTIP, addressing concerns that the agreement will negatively impact U.S. jobs and workers. While the partnership was actively promoted under the Obama administration, the likelihood of its ratification under Trump is viewed as unlikely.
- Rejection of "Cap and Trade": The 1 June 2017 statement of withdrawal by the U.S. from the Paris Climate Agreement of 2015 is another example of the Trump administration adhering to the nationalistic overtones put forth during his presidential campaign. Withdrawal from the agreement effectively deters U.S. industry from being subject to a formalised cap and trade system of carbon-emission regulation, one which President Trump fervently opposes. This development runs parallel to the U.K.'s potential exit from the EU Emissions Trading System (EU ETS), due to Brexit. While any potential result of both the U.K. and U.S. operating free of standardised emissions regulation is largely speculation, the common ground may encourage enhanced industrial output and cooperation while bolstering industrial growth.
- Post-Brexit Trade Deals: The autonomy gained by the U.K. from exiting the EU may prove to be an advantage when crafting trade deals with the U.S. Shortly after being elected, then-President-Elect Trump promoted the notion that his administration would offer a "quick and fair" trade deal to the U.K. in support of the Brexit vote. As support for the idea of enhancing trade between the U.K. and U.S., President Trump and British Prime Minister Theresa May publicly championed a comprehensive trade deal to be put in place upon the U.K. taking leave from the EU. An exclusive trade deal between the two nations may afford many advantages to domestic companies, placing incentive upon U.S.-U.K. trade.
Successful prognostication regarding the future of politics and economic policy is a challenging endeavour at best. But there is a possibility for substantial U.K. industrial growth if exclusive trade deals are crafted between the U.K. and U.S. furthering the economic cooperation, particularly when coupled with reduced environmental regulations. In the event that U.K. GDP experiences a formidable rise, the GBP may find itself the beneficiary, and in a positive long-term position globally.
Without question, President Donald Trump is a polarising international figure. Harsh criticisms have been forthcoming from both advocates and detractors on a wide range of topics, addressing everything from policy decisions to posts on Twitter. While the critique of a sitting American president is the norm, the eventual success or failure of an administration often becomes a matter of interpretation.
In regards to the British pound, the period of time since Trump's election can be interpreted as being positive. Empirically, the GBP's exchange rate value against global majors has posted moderate to robust gains, with the possibility of extended appreciation being very real. However, there are many challenges and questions surrounding the mechanics of an eventual Brexit, as well as heightened political conflict within the governments of the U.S. and U.K. The culmination of many factors will determine the British pound's long-term global strength.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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…