English Pound to Euro Exchange Rate: Understanding Brexit’s Impact
At the start of 2021, the pound was approximately 15% weaker against the euro than before the June 2016 UK European Union membership referendum. Sterling was also 20% weaker than in December 2015 when the EU Referendum Act received Royal Assent. Brexit has significantly impacted exchange rate volatility and the pound’s value.
Over the last five years, Brexit has been a key factor influencing the English Pound To Euro Exchange Rate. Immediately following the referendum, sterling experienced its largest single-day drop in 30 years. Two further substantial declines in 2017 and 2019 brought the pound to new lows against the euro and the dollar by August 2019.
Financial institutions sold the pound due to anticipated increased trade friction between the UK and the EU, its largest trade partner. This increased uncertainty and persistent political instability further fueled the sell-off, driving down the pound’s value.
An exchange rate is the price of one currency relative to another, fluctuating with supply and demand. The pound’s decline since the referendum indicates decreased demand relative to other currencies. Understanding the factors affecting currency demand is crucial to grasping the Brexit-related exchange rate movements.
Organisations involved in international trade participate in currency markets, influencing the english pound to euro exchange rate. However, the rapid decline of the pound after 2016 predates actual trade changes between the UK and the EU. Moreover, trade in goods and services doesn’t typically change drastically in the short term, suggesting other factors were primarily responsible for the pound’s volatility.
A crucial factor was the decreased preference of financial institutions to hold pound-denominated investments. Currency trading for investment purposes constitutes the largest portion of currency transactions and drives exchange rate fluctuations, especially in the short run. This “hot money” moves rapidly between investments and currencies, significantly impacting exchange rates.
Financial institutions like banks, securities firms, and institutional investors are the most influential participants in currency markets. In 2019, they were responsible for 57.8% of foreign exchange turnover in the UK, compared to only 4.9% attributed to non-financial customers. The UK’s persistent current account deficit, where imports exceed exports, further increases reliance on foreign capital and makes the pound vulnerable to international capital movements.
Financial institutions primarily respond to factors influencing investment returns in different currencies. The pound’s decline post-Brexit suggests that investors believed pound-denominated assets would underperform. Several factors can affect returns, including changes in relative interest rates, risk assessments, and overall investor expectations, all impacting the english pound to euro exchange rate.
Changes in interest rates significantly influence exchange rates. Lower interest rates in a country reduce the return on linked assets. An unexpected decrease typically leads to reduced demand for those assets, causing the currency’s value to fall. Following the Brexit vote, the Bank of England reduced interest rates and increased quantitative easing, but this was weeks after the initial pound devaluation, indicating other factors were at play.
Increased uncertainty surrounding factors like company performance, economic outlook, interest rates, and political stability increases the risk of holding assets in a specific currency, reducing investment flows. The likelihood of increased trade friction between the UK and the EU after Brexit amplified these risks for pound-denominated assets. This uncertainty was compounded by persistent political instability in the UK, further deepening concerns about post-Brexit trade and economic outcomes.
The substantial falls in the pound coincided with periods of heightened political uncertainty, reflecting increasingly negative expectations for sterling investments due to the growing likelihood of a “hard” Brexit. Conversely, improved hopes for an orderly Brexit and a trade deal led to increases in the pound’s value, highlighting the close relationship between political stability and the english pound to euro exchange rate.
Investor expectations play a crucial role in currency movements. Changing expectations are quickly incorporated into currency markets due to high trading volume and speed. Any information affecting currency expectations is rapidly reflected in exchange rates. The record fall in the pound after the referendum, which caught many by surprise, illustrates the immediate impact of changing market expectations.
The significant pound declines in 2017 and 2019, during periods of political uncertainty, reflect increasingly negative expectations for sterling investments due to the potential for a “hard” Brexit. This underscores the importance of market sentiment in driving the english pound to euro exchange rate.
One consequence of a falling pound is that foreign goods, services, and assets become more expensive for UK residents, leading to higher inflation and a higher cost of living. However, a weaker currency can also make exports more competitive, potentially benefiting the trade deficit and economic growth. The overall balance of these effects remains uncertain, particularly given the ongoing uncertainties surrounding post-Brexit trade. Further research is needed to understand the long-term consequences of the Brexit-related fall in sterling and its impact on the english pound to euro exchange rate.