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Brexit

What would Brexit mean for the Pound?

Published: Tuesday 14 June 2016

So many claims have been made about the effect that the UK leaving the EU might have on the UK economy, on jobs, on pensions etc. but the question our clients are all asking is the one above.

The answer, as with everything about this referendum, is a tricky one to answer directly but there are some certainties. One is that, if the count on the 24th June reveals a 'Leave' decision,  Sterling will weaken. It has already begun as the 'leave' Campaigns have started to gain greater support in the polls but the reality of a decision to leave is another thing altogether.

The depth of that weakness is an unknown but the fact that the markets are pre-empting the vote may soften the initial reaction somewhat. Nonetheless, we shouldn't be surprised if the Pound falls to USD 1.38 and EUR 1.23 even if that is just the briefest of visits. Whether we will see Sterling hit the lows we saw in 2013 is entirely guesswork. The global economy was in a very different phase then and the UK economy had not yet started to recover from the 2007 debacle.

Don't be fooled though; a weak Pound is not an entirely bad thing. It does tend to increase inflation but UK inflation is down at virtually 0% at the moment and there is very little sign of pipeline inflation anyway. It does though make UK exporters more attractive and affordable to overseas clients and that is precisely what Britain will need if it is to operate outside the EU. 

Dependent on the rapidity and enthusiasm with which new trade deals are assembled and existing trade deals renegotiated, Sterling will recover. How far it will have fallen when those things happen will determine the size of that bounce. Underlying that will be a robust economy, largely driven by service industry expansion and by the recovery of oil and energy prices. 

Fears over interest rate hikes from the Bank of England in the wake of a 'Leave' vote may be overplayed; a central bank faced with a currency slump may be tempted to lift the interest rate to attract inward investment but if the economy is likely to be fragile for a period, a rate hike would dampen any vestiges of economic strength and cause further instability; not a good thing on the BOE's CV.

Ultimately, it would be inevitable that the Pound would remain weak post-Brexit but no one can say how long and how deep that weakness would be and few are tempted to hazard a guess.  Prior-preparation and risk management are essential in these unprecedented circumstances.