British Pound Remains Volatile Following Brexit Vote
The British pound has been trading lower over the last six months on fears mounting from the Brexit vote. More recently, the pound has faced additional pressure from concerns about the economy, the early departure of Mark Carney, the head of the Bank of England, and a recent ruling on whether or not the prime minister needs to consult Parliament before initiating Brexit proceedings.
The British pound has been heading lower ever since June 23, when the United Kingdom voted in favour of leaving the European Union (EU), with the “exit” campaign winning a slim 51.9% majority of the vote.
There were mounting fears that leaving the EU would isolate the country economically and send it into a recession. In the weeks following the Brexit vote, the British pound fell approximately 13% against the U.S. dollar from $1.48 to $1.28.
Bank of England Governor Sets Date to Step Down
The pound has continued to slide since then. In early October, the pound took a hit when Mark Carney, the governor of the Bank of England, said he would only serve until 2019. This is one year longer than the five-year term he agreed on when first appointed but is far less than the eight years that governors typically serve.1
The governor is supposed to be neutral when it comes to political matters, but Carney weighed in ahead of the Brexit vote and predicted that leaving the EU would most likely lead to a slowing in growth, rise in inflation, and possibly lead to a technical recession. To date, none of this has transpired.
In her first speech as prime minister, Theresa May told an audience that a “change has got to come” with regards to U.K. monetary policy.2 Many took this as a harsh critique on Mark Carney and that his monetary policy isn’t working at stimulating broad based economic growth.
This lack of confidence is what many believe forced Carney to say he’d leave his post as governor of the Bank of England in 2019. Uncertainty around the U.K. economy and who will eventually take over as head of the Bank of England sent the pound to a low of $1.20 on October 11, a 19% decrease over the pre-Brexit vote.
Pound Rises as High Court Rules against Theresa May
The majority of those in the U.K. may have voted in favour of leaving the EU but that doesn’t mean it will actually happen. On November 3, the High Court ruled that the Government cannot trigger Article 50 of the Lisbon Treaty, initiating Brexit proceedings. Instead, Theresa May will need parliamentary approval before triggering Britain’s exit from the EU.3
This optimism sent the pound to a three-week high of $1.23 on November 3.
But, even that is not the final word. Theresa May says plans to initiate Brexit by the end of March 2017 will not be disrupted by the High Court ruling.
With the Brexit vote in jeopardy and the Bank of England’s monetary policies in the spotlight, the pound could experience gyrations in the coming months, especially if economic indicators point to a weakness in the British economy and the Bank of England initiates more quantitative easing.
This opens the window of opportunity for investors, especially those interesting in Forex (currency) trading and options.
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- “Mark Carney to stay at Bank of England until 2019,” The Guardian, October 31, 2016; https://www.theguardian.com/business/live/2016/oct/31/mark-carney-bank-of-england-speculation-eurozone-gdp-business-live.
- “Theresa May might have just started a war with the Bank of England,” Business Insider UK, October 5, 2016; http://uk.businessinsider.com/theresa-may-criticises-the-bank-of-england-in-conservative-conference-speech-2016-10.
- “High court says parliament must vote on triggering article 50,” The Guardian, November 3, 2016; https://www.theguardian.com/politics/blog/live/2016/nov/03/article-50-high-court-ruling-high-court-set-to-rule-on-whether-mps-should-vote-on-triggering-article-50-politics-live.