The effects of the Brexit referendum have proven to be more than it was anticipated especially in the financial markets. Of all the affected currencies, the British pound seems to be feeling the most heat. The market seems to be the UK government so hard for the lack of planning in the Brexit referendum.
If you look at the GBP, it has gone to level that is more than 10% below its levels before the referendum. Despite the Great Britain Pound being among the strongest currencies in the worlds economy, it seems to be bowing down to the pressure of the Brexit results. All factors seem to be going against it and it is most likely that this will go on for a period of time before it is able to fully recover to its previous levels.
Compared to other currencies like the US dollar and the Euro Pound, the Great Britain Pound has a very low strength. Therefore, if you go to the Forex market, prices of currency pairs like EURGBP and GBPUSD, you will certainly recognise the sharp downward trend of the prices. This is set to continue in the coming future since the UK government is yet to trigger article 50. And even after the article 50 is triggered, there is no predictions as to how the market prices will behave as from then.
Triggering of the article 50
When the Article 50 will be triggered, there will be a negotiation period of approximately two years. Little can be expected to happen in the early months of the negotiations untill late in the twenty third month which will see several overnight meetings happening in Brussels in a struggle to try to thrash out a lucrative deal with the European Union.
Furthermore, if there will be any deal that will be reached, it will also take some time for it to be ratified by the 27 members of the European Union. The ratification will not be an overnight affair and it may end up taking more time than expected as countries push and pull.
Even the financial markets investors wait earnestly for the triggering of the article 50, this may have to wait longer after the incumbent prime minister, Theresa May, indicated that the article 50 will not be invoked before there are well laid out and agreed strategies for the British negotiations. And this may mean it may have to wait till some time next year.
However, as all this will be happening, the European financial market will very volatile, since there will be no clear outcome as to how the economies will relate to the United Kingdom. This will however be a Christmas come early for the Forex investors who have enough money to invest in the financial markets. The investors will have a long time to enjoy themselves while making millions out of the crisis
This is expected to be a time when the Great Britain Pound will be seeking to flex it muscles but the other European countries currencies will also be busy showing their might against the British pound.
Bank of England scramble in bid to rescue the Pound
There have been wild speculations in the financial markets regarding the steps that the UK’s government will take in trying to improve its hard stricken economy in the wake of the post Brexit crisis. The financial traders have been very cautious on trading the British Pound waiting for the Bank of England decision on the interest rates.
True to the speculations, on 9th of September 2016, the Bank of England launched what it called a monetary stimulus package. This was an effort towards preventing the United Kingdom from sliding into recession as a result of the shock of the Brexit vote results.
This stimulus package included an interest rates cut and a £170 billion package that is to be funded by the central bank. The cut in that interest rates had long been anticipated by the financial traders but it was more than forecasted. The interest rates went to a new record low of 0.25%; which was somehow a shock in the financial markets.
The £170bn monetary package is to be made out of an addition of newly printed money by the Central Bank of England. This will include a £60 billion of government bonds purchases, £10bn corporate bonds purchases and a £100bn of private bank funding.
Apart from this stimulus package affecting the mortgage repayments, it will also have a very profound effect on the stocks and shares markets. For example, the share index of the FTSE 100, where most of the multinational firms invest the majority of their revenues, rose quite sharply after the release of the Bank’s stimulus package giving an indication that investors with savings in the main stock market benefited. However, a good proportion of the rise in the share prices was due to their week position of the sterling pound following the Brexit vote.
The low interest rates also mean that England’s citizen will automatically have to dig deeper into their pockets when purchasing goods or services abroad like from the US or other European nations.
The Sterling however was affected negatively and it will likely suffer due to the expected fall in the capital inflows caused by the low interest rates. For example, if we look at the GBP/USD pair, we will notice that it is now heading towards the lowest of its post-Brexit range and will probably test the thirty years support level of 1.3040 in the coming future from a range of fresh highs of 1.4700 before the Brexit vote.
Although, the financial markets investors are expecting to see some retaliation from the UK’s government, thus will most likely take some time to push the pound back to its previous heights. As it stands now, the British pound is expected to keep testing its lowest of lows untill there are sufficient forces to push it up again. Those investing in Forex are most likely looking to going short on all assets which list the GBP as a partner.