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You are here: Home / British Sterling / What could happen to the Pound after the Referendum?

What could happen to the Pound after the Referendum?

June 16, 2016 by Rob Lloyd

What could happen to the Pound after the Referendum?
  • The potential impact of a Brexit on the UK economy
  • The impact it could have on the EU
  • GBPEUR and GBPUSD forecasts

What’s interesting about the upcoming EU Referendum – now only 7 days away, is that despite the odds of a Brexit now growing, Sterling has managed to hold its own against the Euro and US Dollar.

gbpeur strength before referendumThis morning alone, GBPEUR rates have almost jumped a cent since the beginning of trading with very little economic news. And despite Betfair reducing their odds of a stay to 60% and polls indicating a Leave is on the horizon, the market is still confidently trading as if nothing major is really going on, which makes me wonder whether a Brexit has been priced in at all.

In reality, markets have plenty of time still to change their minds and the next few days could be some of the most volatile periods since the great recession in 2007.
Should we be worried about a Brexit?

Is a Brexit bad for the UK economy?

I hold the view that a Brexit would be negative for the UK economy in the short term, as well as the US and Eurozone. Irrespective of the views and opinions surrounding the reasons for staying or leaving the uncertainty it would create may harm job growth, spending and thus inflation.

What will large businesses do if their main headquarters are in the UK and they want to continue trading effectively within the EU? Or what if SME’s who rely on EU trade and cheaper imports are suddenly hit with trade tariffs?

When the rights of expatriates abroad are under question what will happen to international property purchases? Will EU citizens invest in properties in the UK?

All of this is speculative but with very little strategic plan from the Brexit camp, it almost feels like we are jumping into a black hole.

How could a Brexit impact the EU?

DavosThere are those that hold the view that the UK need the EU and vice versa. The UK exports almost 50% of its trade to the EU, whilst only receiving about 10% back. On the other hand, the UK is one of the largest contributors to the EU and is one of the few nations to contribute more than it takes. In reality, a breakup would be harmful to both parties. The UK remains one of the largest contributors to the EU at around £7bn, if the UK were to withdrawal entirely from the EU the other major contributors would have to foot the bill, this could cause upset within the EU. The other concern is a potential domino effect, with other EU nations opting to leave.

There are many other non-financial implications for the EU if the UK opt to leave the EU. The UK has a large international influence and one of the strongest Armed forces in the World.

GBP EUR forecast after the Referendum

If the UK leave the EU

Given how poll movements supporting a Brexit have weakened Sterling in recent weeks it’s difficult to argue that a Brexit outcome would be positive for the Pound.

In the event the UK withdrew from the EU I suspect GBPEUR rates to fall to the mid to low teens, 1.13-16, but this could be the start of further weakness for both currencies.

If the UK were able to secure a deal efficiently, either through entering the trade Bloc as a member of the EEA or agreeing bilateral agreements similarly to Switzerland, the Pound will begin to strengthen once investors are able to see a secure outlook for the UK. If the EU however, decide to give the UK a bad deal or both parties are unable to agree to new terms, there is a chance rates could fall to parity whilst investors move to safe haven currencies such as the US Dollar or Swiss Franc.

Then of course, there are the economic releases which could put further pressure on Sterling. If BoE’s Mark Carney is correct, the UK could face another recession and may be forced to cut Interest rates further, in any event, this could weaken the Pound.

The short to midterm outlook for the UK is shrouded in uncertainty and during these periods Pound Sterling will be open to big swings until formalisation begins to shape. Damage could be limited if the UK were able to secure a deal with the EU efficiently but there Is no guarantee this will happen.

If the UK remain in the EU

If the UK remains in the EU the Pound will rally both against the Euro and the US Dollar. I predict GBPEUR rates to strengthen into the mid 1.30’s with GBPUSD rates to move into the high 1.40’s, low 1.50’s.

Recent UK economic data has been largely positive, whilst US figures released today once again demonstrated why the US is not ready for an Interest rate hike. One of the main reasons for US Dollar strength currently is due to its status as a safe haven currency, and during times of uncertainty investment generally shifts to these currencies.

Generally speaking, a remain vote could be positive for Sterling and positive for the economy, a continuation of existing arrangements and a level of certainty for businesses, investors, international students and many more who could be impacted by a Brexit. Given how close the polls are its difficult to predict which way the vote will go, if you’re concerned about the results you could be better off making the exchange now whilst the rates are attractive.

Filed Under: British Sterling Tagged With: Brexit, EU Referendum, GBPEUR, GBPUSD, safe haven currency

The information on this website is provided for information purposes only. It does not constitute advice to any person on any matter. Every reasonable effort is made to ensure that the information is accurate and complete but we assume no responsibility for and offer no warranty with regard to the same.

About Rob Lloyd

Robert brings with him a wealth of knowledge on what is impacting exchange rates, especially around the subject of the EU Referendum and the implications for Sterling and Euro exchange rates.

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