This article was written at the height of ‘Grexit’ concerns in the summer of 2015. Since then the situation in Greece has calmed, but ‘Brexit’ bets have surged.
With the EU referendum due to be held on June 23rd, the Pound to Euro (GBP/EUR) and US Dollar (GBP/USD) exchange rates have been experiencing considerable volatility.
Worsening UK fundamentals and concerns that the UK may vote to leave the EU in June have seen the Pound lose over 10 cents against the Euro since the dawn of 2016, while the GBP/USD pairing has hit a series of multi-year lows. It’s likely that further shifts will occur as polling day draws closer.
If you want to stay on top of the latest ‘Brexit’ news and track its impact on GBP, EUR, USD movement, our ‘Brexit’ category is updated every week with a roundup of recent events.
In recent months, the possibility of a Greek exit (‘Grexit’) has placed significant pressure on the Euro (EUR) exchange rate and perhaps that’s with good reason.
The possibility of Greece leaving the Eurozone caused investor sentiment to wane as many experts predicted that the loss of the nation could result in a domino effect, extending to other Eurozone members.
Contagion Threat Pressures Euro (EUR) Exchange Rate
If Greece left, other nations may want to follow; even worse, if Greece left and actually prospered, it could mean a downfall of the Euro as other members of the currency bloc followed suit. The Eurozone could become unstable and the fate of the Euro could be seen as impermanent. Not to mention, the loss of Greece could leave the whole Eurozone more susceptible to shocks.
So what could this mean for the Euro (EUR) exchange rate?
It’s expected that if Greece does choose to leave the Eurozone in a ‘Grexit’, the Euro exchange rate would drop. Furthermore, it may remain fragile for some time as investors weigh up the possibility of further exits.
It could be that if a successful ‘Grexit’ were to happen, radical parties like Syriza who vowed to dig Greece from its current hole would rise in popularity, causing political uncertainty, general volatility and a weaker Euro as a result.
UK General Election Hindering Pound Sterling (GBP) Exchange Rate
As we draw closer to the UK general election, the Pound is becoming increasingly bruised against a host of other majors, including the Euro (GBP/EUR). There are many reasons for this, including the prospect of a political shakeup and a UK referendum.
Last year, Scotland was given a referendum and citizens decided whether they wanted to remain within the UK. The Pound Sterling exchange rate sank as hypotheses emerged and the fate of the UK appeared unstable.
The same thing would be likely to happen again if the UK were to vote on whether to remain with the European Union. While political party UKIP wishes to hold a referendum this year to determine the fate of the UK and the EU, other parties such as the Conservatives are willing to wait until 2017. However, other parties such as Labour don’t wish to hold a referendum at all.
But what would a British exit (‘Brexit’) mean for the UK and the Pound Sterling exchange rate?
The currency would be likely to drop, as uncertainty unfolds; if there’s anything market’s don’t like, it’s uncertainty.
In its latest research, Open Europe reported that a ‘Brexit’ could see the UK reach one of two outcomes.
Open Europe stated: ‘Our estimates of the impact of Brexit range between the UK being 2.2% of GDP [Gross Domestic Product] worse off in 2030 if it leaves and reverts into protectionism; to UK being 1.6% of GDP better off in 2030 if it leaves and pursues economic liberalism. In reality, the UK may fall somewhere in between, with the most realistic scenario ranging from -0.8% of GDP to 0.6%. This means that Brexit is a more finely balanced calculation than most previous studies have concluded.’
However, perhaps the prospect of the UK reverting into protectionism is quite a slim one with some political parties suggesting that stronger trade links with areas outside of the EU need to be made now in case the possibility of a ‘Brexit’ occurs.
If either a ‘Brexit’ or a ‘Grexit were to occur, the Pound Sterling or the Euro exchange rates would be likely to sink and may remain vulnerable for some time—especially if economic growth struggles in the fallout. However, if economic growth were to continue, the Pound Sterling (GBP) and Euro (EUR) exchange rates could regain strength and perhaps come out of the situation stronger than ever.