We all heard the doomsday news and saw the ‘crash’ in the market, in the days that followed the Brexit vote in the UK on 23 June 2016.
What followed, was a large amount of uncertainty, in particular across financial markets. The value of the British Pound (GBP) slumped to a new 31 year low, and we have since seen evidence that the UK economy is slowing, with the UK Government announcing £25bn in extra spending for 2018-19 to support the economy.
This has also affected many people personally, with the drop in the pound making holidays more expensive and families feeling more financially squeezed than they have been in more than 50 years.
Despite this, we have seen the pound gradually steady itself and strengthen over the past eight months, especially against the US Dollar.
On the day of the referendum (23 June 2016) the GBP was at 1.4868 to the US Dollar, which was actually a low, compared to earlier that year; on the 16 January it had been at 1.19857. Today’s price (April 2019) sits around 1.4321, which is not far off the same price as the day of the referendum. In short, we are more or less where we were before the referendum.
There are a number of factors that could be influencing the pound.
People’s spending power has dropped since June 2016, with people in the UK financially worse off since the referendum as costs have gone up due to inflation.
But, inflation is not all bad. Since the referendum, the UK has seen inflation rise faster than the rest of Europe. This has meant that organisations outside of the UK have been able to take advantage of the cheaper pound, both in buying products and investing in companies in the UK.
Interest rates have also risen for the first time in ten years. If you are a saver you have seen the interest rate boost your savings and pensions, but if you are on a tracker mortgage or have borrowed money, your repayments will have gone up.
And finally, the biggest factor affecting currency markets, is trade agreements coming out of Brexit. If we leave Europe with bad trade agreements, it’s reasonable to expect that the pound will take a considerable drop against other currencies, as confidence will evaporates. Other factors that will play into this are the cost of importing or exporting goods in or out of the country, the ‘red tape’ and associated costs that UK companies will need to go through to get access to the single market (Europe). Alternatively, if we leave with a positive trade agreements in place we can expect the pound to rally.
No one knows, or can predict, what will happen next to the pound, but with further positive talks expected around trade between the UK and other countries, it seems a reasonable assumption to expect the pound to further strengthen across all other currencies, possibly even rising to back to 1.5780, which we last saw back in June 2015.
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The information here has been prepared by Learn to Trade. It is offered as an opinion and should not be considered an offer or solicitation to invest. Whilst the information provided is believed to be accurate at the time of publication, no guarantee is offered on the accuracy or completeness of the information given. Learn to Trade accepts no responsibility for the information and comments. Consequently any person acting on it does so entirely at their own risk.
Henry Ward, Financial Markets Trader at Learn to Trade