Impact Brexit is having on the pound

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IT’S been just over a week now since the surprise announcement that Britain had voted to leave the EU.

Since then, there have been a number of movements in the pound in both directions.

While there have been lots of headlines about the pound rising or falling, it’s worth remembering that we are still at the beginning of a long journey and it’s likely that there will be a more fluctuations – both up and down – along the way as markets react to each new development.

 

The reaction so far

It’s been a very busy period for the pound. It was steadily climbing against the dollar in the week leading up to the referendum but fell to a 31 year low once the results were announced, followed by a couple of ups and downs as the markets digested the news

So what have been the main factors affecting these movements?

Throughout the referendum campaign period, the pound generally tended to rise if opinion polls were in favour of Remain and fall if they showed a lead for Leave.

On voting day, both the final opinion polls and the betting odds were suggesting that a vote to remain in the EU was most likely, causing the pound to climb to 1.50 against the dollar, the highest it has been so far in 2016.

This changed rapidly when the first results started to come through, as they suggested that Remain had not done as well as expected. The pound continued to fall through early Friday morning, falling as low as 1.33,the lowest level since 1985. But after the initial shock, the markets did start to stabilise.

Throughout Monday and Tuesday, the initial signs were that the market was starting to recover from the shock, as both the FTSE 100 and the pound started to rise again. But markets then became more nervous again on Thursday, when the Bank of England suggested that some monetary stimulus was likely to be necessary over the summer.

The situation has been broadly similar for the pound against the Euro. However, it has been slightly complicated by the fact that the European markets were also influenced by the referendum result. This means that, comparatively, some of the fluctuations between the pound and the Euro have been less severe than between the pound and the dollar:

What will happen next?

The reaction so far has shown that the pound is currently in a volatile position. Each piece of breaking news can have a short term effect on its value, but the longer term picture is currently much harder to predict as there simply isn’t enough information at this point.

But there are a few key events to look out for that may have an impact:

  • More economic data: this should start to come through in late July and it might provide a clearer picture of how the UK has been affected by the referendum result.
  • Monetary policy action from the Bank of England: Mark Carney has given a clear signal that the Bank of England will be looking at how they can try to offset some of the negative economic shock that they expect to see following the referendum result, possibly this month.
  • New Conservative leader: a removal in uncertainty could cause the pound to rise, but it may depend on who is chosen. For example, the pound briefly rose when Boris Johnson announced he wouldn’t be standing in the leadership election.
  • Article 50 triggered: a delay in this could cause the markets to become nervous again due to the ongoing uncertainty, which may cause the pound to gradually decline.
  • New trading deals: if it appears these will be favourable for the UK, the Pound is likely to rise. But delays in negotiations or negative sentiment from Europe could have the opposite effect.

How can you prepare?

The good news is that, whatever happens next, there are a few options for you to consider that could help to reduce the risk of currency fluctuations.

If you sign up for a HiFX account, you will have the option to set up personalised rate alerts, which will let you know when your target currency hits your desired rate.

If you spot a favourable rate, we also have a couple of ways to help you take advantage of this. If you need to make regular transfers, such as for a mortgage or a pension, we can help you set up a regular payment plan. This automates your payments and secures the current exchange rate for up to two years.

If you know you have a single large payment coming up, such as a property purchase, you could set up a forward contract. This allows you to buy currency at the current rates, but pay for the majority of it up to two years later.

Source: http://www.hifx.co.uk/

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