MHA | The Brexit Effect on Foreign Exchange

The Brexit Effect on Foreign Exchange

Posted on: July 21st 2021 · read

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It has been just over five years since the UK voted to leave the EU, and the world has changed dramatically since June 2016. The global pandemic has not helped UK businesses much one way or another either since the end of the transition period.

At the start of 2021, sterling was 15% weaker relative to the euro than it was on the eve on the referendum of the vote for the UK to leave. There are multiple reasons as to why currency moves, but over the last five years one of the main factors of the fluctuation of currency rates is because of trade frictions between the UK and the EU. The increase in the uncertainly and persistent political instability resulted in financial institutions looking to sell off the pound, and as a result the value of the pound became weaker.

Brexit has created a significant amount of uncertainty in the foreign exchange market, however, the fall in the value of sterling occurred before Brexit had actually taken place. In contrast, exchange rate movements were relatively minor when the UK actually left the EU and the transition period ending at the end of 2020.

One immediate consequence of a fall in sterling is that foreign goods, services and assets become more expensive for UK residents. This results in higher levels of inflation and a higher cost of living.

But a weaker currency can be beneficial since it can make exports more competitive by reducing the cost of domestic goods and services to residents of other countries. This can potentially have positive consequences for the country’s trade deficit and aggregate economic growth.

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