The British Pound, Brexit and the Pandemic

Source: www.benzinga.com --- Friday, May 22, 2020
In the five years since the British parliament passed a law calling for a referendum on whether the UK should remain in the European Union or leave, there have been many intervening moments affecting the global economy, including the Brexit vote itself in 2016 and now the coronavirus pandemic. During this time, one element has remained constant: the British pound (GBP) rallies when the UK moves toward deeper integration with Europe, and falls when the UK moves towards a no-deal Brexit decision. Investors were reminded of this once again in early May as the UK and EU negotiations hit an impasse, with both sides citing a lack of progress on issues ranging from fishing rights to business-competition regulations. Since the negotiations stalled, the pound has slid 3% versus the euro (EUR) and 4.5% versus the US dollar (USD). This is the latest installment in a longstanding theme: Between the time the UK Parliament called the referendum on June 9, 2015, until the referendum itself on June 23, 2016, GBP slid 4% versus EUR and 3% versus USD. In the months after the referendum, GBP plunged 17% versus EUR and 21% versus USD. Since the referendum, GBP has tended to rally when it looked like a deal was close (+21% versus USD into early 2018 as then Prime Minister Theresa May held negotiations) and tended to sell off when Brexit appears to be headed towards the “no-deal” scenario (-16% when May’s deal was repeatedly defeated) (Figure 1). Fig ...

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