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Understanding Brexit

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We are now approaching three years since, on the 23rd of June, 2016, the citizens of the United Kingdom voted in a referendum to leave the European Union. The European Union is an alliance of most European nations dedicated to fostering relations between the nations and facilitating free trade and immigration. A populist fear of the aspect of immigration and its effect on the working class of the UK, as well as qualms about the UK’s mass contribution to the union, seen as a large price to pay, primarily influenced this movement. This decision became colloquially known as “Brexit.”

Policymakers recently extended the original deadline for the actual withdrawal from March 29th to October. But, much of the drama surrounding the March deadline has resulted in a clear effect on the UK and world markets, including the currency market.

A Brief Political History of Brexit

Within one day of the original UK referendum to leave the EU, then-Prime Minister David Cameron resigned, giving way the following month to Theresa May to take over as PM. The UK government would then form various offices for the purpose of a smooth withdrawal from the EU, including the appointment of David Davis as Secretary of State for Exiting the European Union. The European Commission, the political branch of the European Union, also created offices for the same purpose. Policymakers proposed a withdrawal agreement to the UK government to define the UK’s relationship with the EU post-Brexit. Parliament rejected it twice before an extension of the period to invoke withdrawal, to the 31st of October later this year. It goes without saying that this political news has had a tremendous effect on the economy of the UK including its currency.

British Pound Sterling

Since the June 2016 referendum to leave the EU, the British pound sterling has constantly declined in value. Immediately after the referendum, there was a sharp drop, with the GBP to USD down 17 percent immediately after the vote. The value of the pound sterling decreasing means that the demand to buy and hold the currency is decreasing as well, because of poor faith in the future of the pound. To learn about how currency markets work, check out this article: Basics of Forex Markets. In Asian trading, many forex traders, traders of currency, operate computer algorithm systems to respond to news developments. Immediately following the Brexit vote in 2016, the commentary coming from politicians, investors, common citizens, and others likely resulted in the huge drop in exchange rates.

The pound to has seen little signs of recovery. There hasn’t been a prominent period since the Brexit referendum vote in which the pound’s value has increased steadily to pre-Brexit levels. It has mostly had a cycle of decreasing, then gaining some stability and maybe slight gains, then repeating. This is mostly the case, and there have been periods in which some positive signs bring a minor recovery. The prominence of short-sellers, who immediately sell their currency after borrowing from a lender, has also pushed the value of the pound lower and lower.

Conclusion

The amount of uncertainty in the British government to maintain economic growth going forward undoubtedly has caused the drop in currency values to extend for as long as it has. Until the UK shows signs of managing a government with long term economic growth, there is little chance that the currency can rebound to pre-2016 levels.

About the author

Co-Founder and WriteratStreetFins| + posts

I'm an incoming freshman a the IU Kelley School of Business and I have a deep-rooted interest in finance and investing.