Any attempt to analyse the winners and losers emerging across the post-Brexit landscape inevitably leads to one rather stark conclusion; namely that, to date, there is no post-Brexit landscape. In simplistic terms, that’s because Brexit hasn’t actually happened yet, of course, and even when Article 50 is triggered at the end of March it will still be at least 2 years before the Great Repeal Bill is enacted and the 1972 European Communities Act is repealed. Until then, the uncertainty which has reigned since June 2016 seems set to continue. Indeed, factoring in the possibility that the UK and EU governments involved will each be leaking their own version of events as negotiations take place (and with 28 governments having a vested interest, the possibility of leaks is all but inevitable), the degree of uncertainty seems set to increase.
The presence of uncertainty, then, is something which will have to be factored into any analysis of foreign exchange across the currency markets for the foreseeable future. One notable aspect, however, is the degree to which fluctuations in the currency markets are now driven by political developments more than the economic milestones – changes to interest rates, inflation figures and employment numbers – which have traditionally had the most impact.
On the grand scale, this has been seen in the 16% drop in the value of Sterling against the Euro since the Brexit vote itself , but the effect was seen in microcosm last November, when the High Court decision stipulating that a parliamentary vote would have to take place before Article 50 could be triggered was announced. This announcement and the assumption (since disproved) that it would delay or disrupt Brexit in some way, caused the value of the pound against the Euro to rise in the markets. Later on the same day the Bank of England announced its latest decision on interest rates and published a quarterly Inflation Report. Neither of these events – parts of the economic cycle which would traditionally have been expected to prompt a reaction – caused anything more than the slightest ripple on the exchange markets.
Similarly, the Euro rose in value against the pound and the dollar earlier this month when the result of the Dutch election calmed fears that the country might be the next to hold a referendum on EU membership as part of a Europe-wide shift toward populism and away from the status quo. In the event, sitting Prime Minister Mark Rutte won a decisive victory over the anti-Islam, Eurosceptic candidate Geert Wilders. Whilst this may have calmed nerves across mainland Europe, the next event capable of sending the Euro either rising or falling is the French election, and with it the possibility of victory for Marine Le Pen. If Le Pen, with her commitment to leaving the Euro and the EU, were to prove victorious, the Euro would doubtless slump, thus firming up the position of the pound.
If Le Pen doesn’t win then the ongoing Brexit directions could shift in either of two directions. An emboldened EU, confident that the shift toward more extreme politics exemplified by Brexit and the election of Donald Trump had been halted, might feel able to treat the UK in a more magnanimous manner, offering favourable terms on trade and border controls. On the other hand, they may decide that, operating from a position of strength, they can drive as hard a bargain as possible, thereby ensuring that no other country is tempted to think about leaving the EU in the near to medium term. This may, of course, lead to the UK crashing out of the EU, single market and all, without any deal having been reached. This particular scenario became, if anything, even more concerning with the recent admission from ‘Minister for Brexit’ David Davis that no assessment of the damage such a move would cause has yet been made.
More to follow
The uncertainty doesn’t end with the French elections of course, since Germany goes to the polls in September of this year. The continuing presence of Angela Merkel, de-facto leader of any unified notion of Europe, is a vital component of longer term stability. As if Brexit didn’t guarantee enough uncertainty in its’ own right, we now have the demand for a second referendum on Scottish independence to add to the equation.
With Theresa May and Nicola Sturgeon both insisting simultaneously that they want to leave one union whilst remaining part of another (the UK and the EU respectively), the chances of a coherent picture of the future emerging any time soon are undoubtedly remote. For those people dependent upon being able to second guess what the currency markets are going to do tomorrow, next week and next year, the best advice seems to be to spend just as much time monitoring political developments as they do factors such as interest rates, employment figures and inflation.