As reports came out that the British public had decided to leave the EU (on the morning of the 24/06/2016), the British Pound (CURRENCY:GBP) plummeted in value. The decline in the value of the pound on Friday was the single biggest depreciation in the value of the pound in a single day (it lost more than 10% of its value relative to the US Dollar at some points during trading.)
In May 2016, the governor of the Bank of England, Mark Carney, warned “A vote to leave the EU could have material economic effects – on the exchange rate, on demand and on the economy’s supply potential – that could affect the appropriate setting of monetary policy.” Many other economic & financial institutions, such as the International Monetary Fund (IMF) warned of potential economic shocks if “Brexit” was to occur. Firms based outside of the UK will also be affected e.g. Tesla Motors Inc (NASDAQ:TSLA) could see European demand for its electric vehicles shrink.
Declining British Pound (GBP) Could Boost UK Exports
The fall in the value of the British Pound (CURRENCY:GBP) was inevitable (in the event of a Brexit), but it could in fact benefit the UK economy. It should be noted that the UK has run a balance of trade deficit over the past few decades, importing more goods & services than it exports (in terms of monetary value.) A weaker British Pound makes UK exports more affordable to consumers & businesses in other Countries. Therefore, a falling Pound could help the UK reduce its trade deficit, or enter a surplus. The deficit would also be reduced as a cheaper pound also makes imports more expensive for the UK, making domestically produced goods more attractive.
Furthermore, a depreciated British Pound gives the UK more leverage when it comes to negotiating trade deals with other Countries, as they will want to quickly arrange a deal so they can take advantage of the current favorable exchange rate. High demand for UK exports is likely to help the UK in terms of keeping unemployment low.
British Pound Falls Further in Asia Trading Today
Sterling fell further as trading opened in Asia today (Monday the 27th of June.) According to an article published on BBC News, the Chief Economist at World First predicted a further significant decline in the British Pound over the coming months, saying “We are still looking for another 10% fall for the pound against the dollar in the coming months as data confirms the economic slowdown and monetary policy expectations increase.”
George Osborn is expected to give a statement before the UK markets open today, in a bid to calm traders & reduce volatility. Some analysts have speculated that the British Pound (CURRENCY:GBP) to US Dollar (CURRENCY:USD) exchange rate (GBP/USD) could fall to the $1.20 level.