Since it was announced that Britain had decided to leave the EU (on the 24/06/2016), the British Pound (CURRENCY:GBP) dropped in value, down by up to 10% on the day, reaching its lowest price relative to the US Dollar (CURRENCY:USD) in several decades. We also reported that the US Dollar could reach parity with the British Pound, & overtake it as the third most powerful currency in the world.
The potential economic shocks of a “Brexit” were issued, particularly in the build-up to the referendum. For example, Mark Caney, the governor of The Bank of England said “The combination could lead to a materially lower path for growth and a notably higher path for inflation”. Mark made these remarks towards the middle of May 2016, around 1 month before the vote occurred.
US Dollar (USD) Has a Real Chance of Surpassing the Euro (EUR)
There is another potential issue that has not been widely reported or speculated. The value of the Euro (CURRENCY:EUR) relative to the US Dollar (CURRENCY:USD) could drop, & potential fall behind the American Dollar. If the UK government is able to negotiate favorable trade deals with the EU & other international economic partners, other core members of the EU may also consider ditching the EU. The Euro would suffer particularly hard if members of the Euro Zone (countries that use the Euro as their domestic currency e.g. Germany, France & Greece) left the EU.
The collapse of the European Union is likely to benefit the British Pound relative to the Euro, & it could remain ahead of it, provided that the UK economy is able to function well & avoid a long, hard recession.
German Car Manufacturers Apply Pressure On EU – Euro Could Suffer
According to an article recently published on the Daily Mail, German car producers have urged the EU, specifically Angela Merkel (Chancellor of Germany), to give the UK a favorable trade deal. The article read “German manufacturers last night demanded that Britain be allowed to continue trading with the EU without any barriers. The car-making industry said punishing Britain makes no sense – and it called on the German chancellor to give the UK a favorable trade deal.”
Although the absence of trade barriers will benefit the economy of the EU, it could eventually lead to its decline, & weaken the Euro relative to the US Dollar. It should be noted that a strong dollar (CURRENCY:USD) tends to lower the price of crude oil. It is unclear what approach the EU will adopt when negotiating trade terms with the UK, but other EU member states will be carefully watching.