Multiple Factors Arise Determining Pound’s Value During Brexit
Last updated on January 17th, 2019
Brexit is looming over almost every other factor associated with the economy. Currency on that part is also facing its toughest test in 30 years.
For the first time in 3 decades, the foreign exchange market has had to deal with potential shocks, both, with the falling and the rising value of Pound.
However, what the world witnessed in the last 30 years had certain predictability of the event occurring, unlike Brexit which is highly unpredictable. As an example, the UK in 2010 faced with uncertainty over the composition of a coalition government after the indecisive elections.
However, it was not something abnormal, and yet the currency market reacted poorly. Another example of pound falling to its lowest level against the US dollar, is the run-up to the referendum on the UK’s membership of the European Union (EU) in June 2016.
Britain is set to leave the EU in less than 80 days now, and the marketers still do not know if it is really happening or not. Besides, even if it does happen, it is still a question exactly how will the trading of goods take place both inside, and outside the country.
To play safe, Britain has also opted to remain tied to the EU for the next 20 months. Even though it further complicates the situation, with 20 more months of being tied with the EU, the nation would remain dependent upon them. Simultaneously attempts to establish itself as a separate identity would come materialize.
There are a lot of arguments about how each move ensures the aversion of any political risk, yet none is aimed at eliminating it from the market. Looking back at a time when Britain freshly held referendum in 2016, pound made substantial gains. This happened despite the presence of some evidence that British people might choose to leave the EU, which was exactly the case when the results came out.
It is worth noting that every currency has its bargaining power, which is dependent upon external factors beyond anyone’s control. However, what still remains linked with each currency is how does it yield globally.
For example, twenty years ago a Japanese investor would have gained a 4.7 percent point advantage from investing in two-year UK gilts, rather than placing them in its own country’s bonds of the equivalent maturity period. Therefore, the investor’s preference was easier back then than it is now. However, the same investor would now earn a rather low, around 0.89 percent, advantage from investing in the UK’s economy.
Therefore, a yield-seeking investor would now consider market conditions, especially at the time of Brexit, when the pound is following both upward and downward trajectories, pretty dynamically. The investor might decide against it because the return now is not as fruitful, as it was a couple of decades ago.
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