For months now, the currency markets have been abuzz with Brexit speculation. Commentators, economists, traders, brokers like FxPro, and politicians from around the globe have all harboured their own personal opinions on the likely outcome, and many of them were proved wrong when the 23rd June vote was announced.
The decision for Britain to leave the European Union shocked the world, with many of its own supporters later expressing their surprise over the outcome. Although some opinion polls had indicated a tentative lead for those who wished to exit, almost no one believed that such a reality would come to pass.
The result was astonishing. In the space of a day, sterling dropped to a 31-year low, £250 billion was wiped from the UK economy, and fears began to rise.
Yet in typically British fashion, the country’s currency has proven itself to be resilient. As it starts to make the first tentative steps towards some form of recovery, we look at what’s happening on the currency markets in the wake of this historic vote…
The Effect of Brexit
Although many accused the ‘remain’ campaign of fearmongering in the wake of the UK’s Brexit referendum, its fears proved well founded when a vote to leave was announced. The value of sterling fell, the stock markets went into freefall, and hundreds of billions of pounds were wiped from the UK economy.
Statistics show that global stock markets became the victim of the largest two-day rout in history, with the waves of sell-offs wiping $3 trillion from their value. The UK itself was the greatest victim of its choice to leave, with both Standard & Poor’s and Fitch Ratings downgrading its credit score, and further cuts threatened. S&P, the only substantial ratings agency to have awarded the country Triple A status, dropped its rating by two notches, to AA.
The reason for these changes, as explained by Fitch, was simple: the forecast of an ‘abrupt slowdown’ of growth for the short-term.
The Pound Pushes Higher
Yet despite the dramatic consequences of this vote, the pound is already beginning to show the first tentative signs of recovery, and as investors stir themselves from their shock, it has now started to push higher.
The two-day selloff seen in sterling on Friday 24th June and Monday 27th June was the greatest in recent history, but despite this, GBP/USD managed to rise 0.84 per cent on Tuesday, coming in at 1.3337 at the close of the day.
The pound also managed to move higher against the euro on Tuesday, with EUR/GBP falling 0.32 per cent, to 0.8307. Although this is not far from Monday’s two-year peak of 0.8378, it still indicates a tentative recovery.
With Brexit done and here to stay, we can only wait to see whether Britain’s fall proves to be more fully reversible in the weeks and months to come.