Unless something unexpected happens, we’re about to enter a new world of national sovereignty. The United Kingdom will no longer be a member of the European Union. The historic moment comes with a host of cautious excitement, and some well-founded concerns about the risks.
Among the many areas where the effects of Brexit – both positive and negative – may be felt are in the foreign exchange market. The question here is fairly simple – Could Brexit actually boost the pound?
Could Brexit Actually Boost the Pound?
To some observers, perhaps most (certainly most highbrow economists), the idea that Brexit could be good for the British Pound is preposterous on the surface. They might say to just go look at what the Pound has done since the Brexit Referendum proved more popular than staying in the European Union.
Figure 1 is exactly such a look. The figure captures the performance of the Pound against the US Dollar in the top pane. The bottom pane has the performance of the Pound against the Euro.
Two colors are shown. The dark blue represents the pre-Referendum period. The dark orange is after the Referendum.
Figure 1: Dollar/GBP and Euro/GBP
Figure 1 is shown in terms of the other exchange currency per GBP (Great Britain Pound). This means that when the Dollar to GBP ratio increases or when the Euro to GBP ratio increases, the Pound is becoming less valuable. For example, the Dollar/GBP ratio in recent years has gone from 0.70 to 0.75. This means that it used to only take 0.70 Pounds to buy one US Dollar. It now takes 0.75 Pounds to buy one Dollar. Thus, in this example, the Pound has become less valuable.
If you look closely at the performance of the Pound pre-Referendum and post-Referendum, the Pound lost value sharply in the immediate period after passage of the Brexit Referendum.
The Pound through, did not continually lose value. In the case of the Pound’s trading value relative to the US Dollar, the Pound actually gained considerabe value in 2017, the first year of the Trump presidency.
Looking at the Figures on a Percentage Basis
Let’s take a look at how the Pound performed relative to the Dollar and Euro on a percentage change basis since the Referendum. Such a picture is depicted in Figure 2.
Figure 2: Change in Dollar/GBP and Euro/GBP Since Brexit
Figure 2 has the y-axis inverted, meaning that a drop in the line is a drop in value for the Pound and a simultaneous gain in value for the competing currency.
As shown, at one point both the Dollar and the Euro were up over 20% compared to the Pound. The two competing currencies have since lost some of their value. As of writing, both the Dollar and the Euro are up about 12% against the Pound since passage of the Brexit Referendum.
Could the Actual Finishing of Brexit Strengthen the Pound?
With the background established, could the Pound actually strengthen once the Brexit process is finally finished?
The answer could very well be yes. The British economy is performing much better than most prognosticators predicted it would post-Referendum.
This performance relative to the performance of the other EU-based economies suggests that a large portion of the 12% drop in the Pound is more fear than anything else.
Once the fear gets replaced with rational consideration, we very well may see the British Pound gain in value relative to the US Dollar or the Euro. Such a performance would, of course, make the prognosticating economists’ ire red hot.
