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March 2015

What is happening to the Pound with the possibility of a Brexit on the horizon?

Published: Thursday 03 March 2016

The starting gun has been fired in the race to vote for Britain either staying in or leaving the EU. 23rd June 2016 is the referendum date and everyone will have an opinion over whether the risks of leaving the EU are greater than the risks of staying. But how is the Pound likely to cope during this unsettled time?

As soon as David Cameron announced that he had completed his negotiations and was ready to ask the UK public for their decision on Britain's membership of the EU, the Pound fell in value.  It slumped again when Boris Johnson announced he would be pressing for an exit; the added weight of The London Mayor's endorsement being seen as vital to the strength of the 'leave' campaign.

However, the drop in support for the Pound shouldn't be seen as an unbridled endorsement for continued EU membership. It is simply the fact that markets hate uncertainty like nature hates a vacuum and few things are more uncertain than a country deciding whether it wants to change a political situation that has developed over 40 years. Undoubtedly, if Britain votes to leave the EU, there will be a whole heap of renegotiation, restructuring and clarification required by the UK government and by the EU. Amongst these are the following.
On average, Britain imports around £33 billion of goods from Europe on a monthly basis and exports around £25 billion to EU member states. If you compare that to the €173 billion that the EU exported in total and the €143 billion that they imported in December 2015, this isn't a make or break relationship for the EU but it is a significant one and there would be incentives for both sides to reach an accord for the future. 

There are roughly 2 million EU nationals working in the UK and approximately 2.1 million Brits in EU states, so arrangements would need to be made to accommodate those migrants that didn't infringe the individuals' rights or the benefit they bring in tax and GDP.

Net of rebates and inward investment, Britain contributes roughly £8.5 billion to the EU coffers each year, (£23 million a day) so it is no surprise that most EU member states would like to see the UK remain a member but this sizeable financial contribution is at the heart of the EU membership debate and yet little is being said about how that money would be spent if it was not being sent to Brussels each year. If there were more certainty over this aspect of a potential Brexit, the markets may look more favourably on the Pound.
But do the UK Chancellor and the Bank of England really want that?

A weak Pound generally fuels inflation because it raises the cost of imports and that would normally be a reason for the Bank of England and Treasury to try to maintain a strong-ish Pound. However, the weakness in energy and commodity markets and the paucity of demand across the globe means there is virtually no global inflation at the moment. So the major benefit of a weaker Pound, i.e. cheaper prices for British goods overseas, is a very attractive bonus for the UK. The UK economy is already in relatively good form and has weathered the recovery from the mid-noughties financial crash with rather more aplomb than most. So the added assistance of an export advantage is very welcome. Hence the BOE is not panicking at the sight of a 10% fall in Sterling's value.

The scene is set for a lot more speculation and a great deal more spin in the debate over Britain's relationship with the EU. That will bring increased volatility and a significant rise in the frequency and magnitude of the spikes and troughs in the value of the Pound. Those extremes of the exchange rate movement are all opportunities, not only for speculators but for those who need to physically deliver currencies to settle invoice, pay bills or make plans to emigrate.

So whilst the sheep-like traders and investors are doing their thing, a cool head and some considered planning will offer all sorts of advantages to those who can keep their heads when all around are losing theirs. Whether they are blaming it on you or the British Prime Minister is of no consequence. 

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