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 E.U., 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 E.U. 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 E.U. In the run-up 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: E.U./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 E.U. 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.
March 2019: U.K. Officially Leaves
With a governing framework outlined and approved by both sides, the U.K. will depart union at 11 p.m. 29 March 2019.
Governmental attempts to sign the actual date and time into U.K. law were abandoned. This development leaves open the possibility of Brexit Day being delayed via Parliamentary vote and EU approval.
As of this writing (May 2018), any stated impacts of Brexit Day upon valuations of the GBP are largely products of speculation.
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 are meant to act as a buffer against economic and social chaos. The plan for this period include 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.
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.