What Impact Will the Brexit Have on the GBP and Investments?
On June 23, 2016, Britons watched in shock and awe as the country voted for a Brexit. Then Chancellor of the Exchequer, George Osborne cautioned that a Brexit would be the end of the British housing market, and Prime Minister David Cameron promptly resigned. Somehow, the doomsday message got lost in a newfound reality: Britain is extraordinarily resilient. The UK economy is now performing at levels that are the envy of competing European economies. Naturally, the GBP weakened to accommodate the shock, but this has been a godsend to the all share FTSE 100 index. That the GBP/USD pair is trading at or near 31-year lows is important on multiple levels. First of all, everyday Britons are now facing the prospect of higher prices at retail stores. Inflation is creeping up.
Will the Bank Of England Reverse on Monetary Policy?
For the Bank of England (BOE) higher inflation is pushing policymakers towards reversing the current policy of monetary accommodation. Recall that the UK interest rate is 0.25% – historically low by all accounts. Rising inflation indicates that too much money is chasing too few goods and services. In other words, aggregate demand exceeds aggregate supply. To counter this, the BOE will have to act by either raising the interest rate or stemming asset purchases. This is an important detraction from current policy which has been accommodative in recent months. The last time the BOE cut rates was in August 2016, but now we’re staring rate hikes square in the face.
When will Prime Minister Theresa May trigger Article 50 of the Lisbon Treaty?
The UK Prime Minister, Theresa May has made it her duty to work feverishly to trigger Article 50 of the Lisbon Treaty, sooner rather than later. The process initiates Britain’s complicated extrication from the European Union. Once it begins, the UK will have just 2 years to be done with the EU, regardless of whether a framework agreement has been put in place or not. The big question is how this will impact upon the GBP and the broader UK economy? If current trends are anything to go by, the GBP/USD pair will weaken, as will other currency pairs that include the sterling as the base currency. Speculative sentiment will drive GBP strength or weakness after Article 50 has been triggered. Currently, the GBP/USD currency pair is down 17% since June 23, 2016. The money markets have pushed the GBP lower for several reasons, not least of which is the referendum. If the interest rate in the UK remains at 0.25%, which many analysts believe will be the case for the rest of the year, the GBP will have nowhere to go but down. Consider that the USD is subject to at least 3 rate hikes this year alone. Each one of them will weaken the GBP/USD pair substantially.
FTSE 100 Rallies as GBP falters
Confusion, uncertainty and inaction have characterized the immediate effects of the Brexit referendum. Sure, the GBP has weakened but no mass panic has set in just yet. The long-term implications of the Brexit will be known when the Brexit framework is provided. If banks, insurance companies and other multinational corporations decide to leave the City of London, in favour of Frankfurt, Paris, and other European destinations, the GBP will take a huge hit. There is no doubt that the UK economy will endure a slowdown as all these big companies seek to galvanize their passporting rights with major European clients. The enticement of low corporate taxes in the UK will hardly move the needle if the same companies are prevented from accessing European clients. From the FTSE 100 perspective, prospects are looking solid. A weak GBP translates into strong FTSE 100 earnings and profits. Thanks to a rebound in commodities and crude oil, the FTSE 100 index is one of the star performers in global indices.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.