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How Would a ‘Brexit’ Affect Pound Sterling to Euro (GBP/EUR), US Dollar (GBP/USD) Exchange Rates?

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The Pound Sterling to Euro (GBP/EUR) and Pound Sterling to US Dollar (GBP/USD) exchange rates have both experienced dramatic movement as a result of ‘Brexit’ concerns, but how is the situation likely to impact the British Pound long term?

Following a weekend of extensive negotiations at an EU summit in Brussels on the 18th and 19th of February, David Cameron announced that the UK EU membership referendum will take place on the 23rd of June 2016.

There has already been wild speculation and dire predictions from both sides of the debate, as well as numerous opinion polls and independent expert analysis. All of this had an impact upon Pound Sterling exchange rates before the actual campaigning even began.

While the forecasts may differ on the impact of a ‘Brexit’, they all agree that the next few months are going to see extreme volatility for Pound Sterling exchange rates on the forex market.

Pound Sterling Exchange Rates before a ‘Brexit’

‘Brexit’ has already made a clear impact upon Pound Sterling, with the GBP/EUR exchange rate falling -6% in the first eight weeks of 2016, while GBP/USD has dropped -4.5% over the same period. There is still a long way to fall, according to Bank of America Merrill Lynch (BaML), which believes Pound Sterling is still overvalued by around 3%. ‘Our valuation suggests that Sterling is overvalued and, in an extreme scenario where capital inflows temporarily slow in the run-up to the referendum, it could face large declines.’

The institution has cited the run-up to the Scottish referendum, where Sterling fell 4% in just 10 days.

Pound Sterling (GBP) to EUR, USD Exchange Rates in the Event of a ‘Brexit’

The majority of forecasts agree that a ‘Brexit’ vote would see Pound Sterling drop in value as investors deserted the British asset, at least until the extent of the economic impact of leaving the EU could be assessed. Goldman Sachs have issued the most dovish prediction, stating that, ‘We argue that, if the UK voted to leave the EU, the UK’s current account deficit would still be a source of vulnerability despite some recent improvement. An abrupt and total interruption to incoming capital flows in response to a ‘Brexit’ could see the Pound decline by as much as 15-20%.’

Credit Swiss also sees a massive depreciation for Sterling, ‘If the UK were to vote to leave, we would expect EUR/GBP to push on towards 0.83, its average level since 2009. This leaves room for GBP/USD to trade towards 1.20 if EUR/USD pushes lower towards parity as we expect. Conversely, if Brexit is rejected, we would expect EUR/GBP to be around 0.70 in 12 months’ time, with GBP/USD well above 1.40.’

Boris Johnson’s ‘Leave’ Campaign Support Demonstrates the Potential for Pound Sterling (GBP) Volatility

The extent to which Pound Sterling exchange rates could be influenced by speculation and developments around the EU referendum was clearly demonstrated on Monday 22nd of February. London Mayor Boris Johnson surprised many when he announced that he would lend his support to the campaign to leave the European Union. The news caused Pound Sterling to crash, plummeting deep into negative territory against all the major currencies.

Following the news the Euro advanced against the Pound (EUR/GBP), nearing an 11-month high, while the Pound Sterling to US Dollar (GBP/USD) exchange rate fell to a seven-year low. The Pound also fell to an eight-month low against the Canadian Dollar (CAD) and a nine-month low against the Australian Dollar (AUD).

Bank of England (BoE) Interest Rate Decision Forecast: ‘Brexit’ will Keep Rates Low

Although both sides of the debate have offered up supposedly concrete facts, overall sentiment towards the fallout from a ‘Brexit’ is one of uncertainty. Business owners, both based in the UK and abroad, are unsure how an independent Britain could affect their companies. The confusion has ironically provided clarity in some respects; according to market predictions the Bank of England (BoE) will not raise interest rates until the referendum has taken place.

Raising interest rates makes borrowing more expensive and curbs inflation as the domestic currency strengthens. If the UK economy is going to be weakened in the run-up to the referendum over the coming weeks, the last thing the BoE wants to do is tighten monetary policy and make the Pound more expensive.

Are Lower Pound Sterling (GBP) Exchange Rates a Bad Thing?

While at first glance it may seem that a weaker currency is a negative, when it comes to the UK a softer Pound could actually be highly beneficial. The strength of the Pound makes it expensive for other countries and overseas companies to do business with the UK. This has seriously hampered our export market, meaning that Britain is currently running an annual trade deficit. If the Pound were to weaken, it would make British goods and services more affordable to foreign markets, which could increase demand and boost the flagging UK manufacturing sector.

As Woodford Investment Management founder Neil Woodford explains, ‘Funny enough, if the currency is weak for a period that is going to be harshly stimulative for the economy so that might be quite good news certainly for British exporters which need all the help at the moment in the manufacturing industry.’

What is the ‘Brexit’ Referendum Forecast to do to Pound Sterling (GBP) Exchange Rates?

While there have been many dovish predictions, it’s always worth taking forecasts with a pinch of salt. Pound Sterling is likely to see multiple large drops in value over the coming weeks as new announcements and research scares investors. Traders are usually quite skittish, so many experts will tell you that their reaction to certain developments is often an overstatement. However, that means that whatever the outcome of the ‘Brexit’, Pound Sterling is in for a bumpy ride over the coming months.