Brexit and the currency market: everything to watch for

Against all odds, the UK voted to leave the EU. This immediately upset the market, and the GBP still has not recovered. But the UK has not yet left the EU – indeed Article 50 has only recently been triggered, and there is a lot to happen over the next couple of years.

UK and EU sat at the negotiating table

The first thing to keep an eye on is both the UK, and the EU’s, attitude towards the negotiations. Both countries have entered the negotiations aggressively, with the EU threatening a large ‘Brexit bill’ and is obstinate regarding a trade deal, and the UK seems ready to go with the ‘nuclear option’ of a zero deal Brexit, combined with slashing taxes and regulations. Whilst this certainly sets the tone for the start of the negotiations, it is likely that both sides will soften as time goes on. If a zero deal Brexit does occur however, it could be great news for the British companies with limited international dealings – the slashing of taxes and regulation benefiting them tremendously. For everyone else however, this would be bad news.

GBP will continue to fluctuate

There is potential for the GBP to drop yet further – whilst it may have suffered after the Brexit vote, if negotiations go poorly there is room for it to drop more. Of particular importance is a potential second Scottish independence referendum – any moves that suggest that independence is on the table, let alone an actual independence vote, will be damaging to the GBP.

There is however an argument that the GBP is likely to start bouncing back. The Pound barely moved after the announcement of the triggering of Article 50, and a number of analysts such as Oxford Economics and Barclays have suggested it is currently undervalued. It is possible that the market had previously been overly pessimistic about Brexit, and treated the vote itself as if the UK had already divorced itself from the EU in the worst way possible. With further fluctuations expected in the near future, investors are making all sorts of decisions as to when and how much investment is being made into the currency.

But what about Europe?

It isn’t just potential votes in the UK that are worth keeping an eye on. France, a major player in the EU, will shortly be having their presidential election. Whilst the anti-EU, anti-Euro Marine Le Pen is very much the outsider at the moment, were she elected, it would undoubtedly weaken the Euro. It could even potentially be good for the UK – Marine Le Pen has positioned herself as an ally of Brexit, and a pro-Brexit voice on the continent could help the UK during negotiations. That said, Le Pen has also positioned herself as an anti-globalist, anti-free trade candidate, and her election could spell doom for any hopes of a free trade agreement between the EU and the UK.

Looking specifically at the financial sector, there are a number of questions yet to be answered. Passporting – that is, the ability for a firm registered in the EEA to do business in the rest of the EEA, has not yet been sorted. EU financial centres are already aiming to poach jobs, with some predictions saying the UK could lose 30,000 finance jobs and £1.6 trillion of bank assets. This would have a large impact on UK based financial services, and be disastrous for the GBP. The impact of this could be mitigated somewhat with a slashing of taxation and regulation, but it is difficult to see a positive scenario for UK finance that doesn’t include a passporting deal – something the EU has said will not happen, and something the finance industry has given up on entirely.

In many cases, Brexit should be considered an opportunity for change, rather than an opportunity missed for the future growth of the EU community. Though unexpected, investors that were bold enough to favour the unlikely will have paid dividends for them, as many will have sought to back the ‘Leave’ result using trading platforms such as Stern Options. Not only that, but with so much future uncertainty regarding trade, economies and referendums, there is much opportunity to start trading in 2017.