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You are here: Home / British Sterling / Why I’m not too concerned with Brexit

Why I’m not too concerned with Brexit

July 13, 2016 by Rob Lloyd

Why I’m not too concerned with Brexit

eu referendum Prior to the results of the Referendum, I can’t help but remind myself of the fear-mongering and stark warnings surrounding a post-Brexit World. Brexit would cripple our financial sector, Brexit would see businesses move overseas, Brexit could lead to more wars.

And whilst we continue to monitor the fallout, four of the biggest US banks have committed to helping London maintain its financial hub status, Chinese bank HSBC and Barclays have also pledged their support for staying in London and others will likely follow suit.

Despite stark warnings from the BoE, Mark Carney has put in place measures to ease the volatility in the markets and could look to cut Interest rates by 25 base points to encourage spending. George Osborne is looking to cut corporate tax to 15% to encourage and retain foreign investment which to me all signals a shift from the initial doom and gloom warnings. Yes, the UK could hit further turbulence and potentially a minor recession in the months ahead. But the UK will pull every string to ensure economic stability and a good deal from the EU.

Is Brexit really a Brexit?

A complete withdrawal from the EU is highly unlikely given how complex the EU-UK relationship is. Firstly, the UK relies on the EU for almost 50% of its exports to the bloc, maintaining free trade would be the number one priority.

And as one of the 4 core principals of the EU, free trade always results in free movement of people. There isn’t a single member in the EU bloc, including EEA (European economic area) members who are exempt from this rule. This news quite likely, would be welcomed by businesses who rely on EU migrants.

But what if the UK opted to return to the WTO (World trade organisation), what would happen to EU migrants already in the UK?

It is in no interest for both the UK or EU to deport foreign nationals, given the millions of UK and EU nationals living in France, Spain and London, deportation would only lead to complicated headaches and a loss in foreign investment.

The other question that needs to be considered surrounds the UK financial contribution to the EU.

As in stands, the UK is the third largest net contributor to the EU. What implications would this have for the rest of the EU? Greece relies heavily on EU contributions, so do the likes of Poland, Hungary, Portugal and Romania. Are Germany and France likely to pick up the losses?

The logical solution for both is to arrange some level of membership that maintains as many of the existing agreements as possible, if the EU want to keep financial contributions from the UK, they may have to strike an agreement of some kind on immigration. If the UK want to limit the damage of Brexit and maintain free trade, they may have to accept a lesser membership of some kind.

Brexit hasn’t started

eu flagsAs most are aware, Article 50 has not been invoked and so the official withdrawal from the EU is still yet to be confirmed. Assuming Article 50 is triggered shortly after, we could be looking at 2 ½ years before we official withdraw from the EU.

This is the absolute minimum period, Article 50 can be extended beyond the 2-year remit if negotiations are not formalised, as long as the majority members adhere to it. But given the UK is the first country ever to leave the EU, timings surrounding Article 50 will likely be treated as guidelines as opposed to strict formalities.

In any event, businesses concerned about the impact of Brexit on trade or employment law should be aware that in the foreseeable, nothing will change, and may not change for 3-10 years.

GBP EUR exchange rates

The one area we can be certain of is the impact of Brexit on Sterling. The Pound dropped over 10% on the news and has been on a downward spiral ever since. What’s the driving force behind these changes? uncertainty.

And whilst uncertainty remains, the Pound will likely trend on the lower end of the scale which consequently makes imports into the UK more expensive, not the best news for some SME’s. On the flip-side, our exports have suddenly become more attractive to foreign investment which could equate to increased revenue in some sectors.

But does any of this equate to anything more than normal fluctuations in the market? Current exchange rates were tested in 2014, 2013, 2012, 2011 and all the way back to the financial crisis in 2007. We’ve been at these levels before and we will likely hit them again in the future.

So once the uncertainty begins to fade, negotiations are on the table and market sentiments begin to flourish, the Pound will likely recover quickly which could be as early as September.

My final opinion on Brexit

Whilst the world continues to be dominated by Brexit, I can’t help but wonder if this political hype will be just become another phase. The FTSE remains at an 11-month high and whilst uncertainty continues to be the major player, business is open as usual.

The reality of Brexit has become such an anti-climax, with all the warnings and speculation, the outcome so far been hugely disappointing from a theatrical sense, most of the attention has been fixated on internal political conflict.

That being said, there will likely be some changes ahead, but I remain sceptical that these changes will be mammoth given the complex relationship the UK-EU have.

For now, take a break from worrying about Brexit, watch the space for updates and attempt not to get caught up in doom and gloom messages.

Filed Under: British Sterling Tagged With: Brexit, EU Referendum

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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