Brexit Could Crush the British Pound
If the United Kingdom were to abandon the European Union (EU)—that is, if Britons vote in favor of what’s being dubbed the “Brexit” on June 23—it could trigger a shock in real estate prices in Britain, with a potential drop of 10%–18%.
What is certain is that the British pound will be under intense pressure in the next few weeks. The pound could lose much ground against its counterparts, especially in the GBP to USD exchange rate, called the cable, and against the euro. This is merely the latest warning about the dire consequences that Britain could face, according to Britain’s worried finance minister, George Osborne.
For those who like to speculate in foreign exchange (the forex market), the British pound will present special risks. This is especially the case considering the potential relationship between the GBP and the USD, particularly after the U.S. Federal Reserve decided to raise interest rates last December.
Usually, political risks of such magnitude as a Brexit have a negative influence on the currency of the country, which, in this case, is the British pound. Investors interested in speculating over the Brexit outcome should closely watch the GBP to USD exchange rate and the U.S. dollar charts to keep abreast of any developments.
In 2016, there has already been considerable downward pressure on the British pound. This is likely to be associated, largely, with the Brexit risk. However, there has also been a weakening of interest rate support for the British pound due to lowered market expectations from the Bank of England itself.
But Britain’s Finance Minister had more “threats” for his fellow citizens to consider. The British Treasury suggested in a study that a Brexit could plunge the country’s economy into a yearlong recession, potentially forcing the elimination of some 820,000 jobs in just two years. (Source: “EU Referendum: Tories in revolt as David Cameron suggests vote to leave EU is ‘immoral’,” The Telegraph, May 24, 2016.)
Osborne is just the latest figure to come out against a Brexit. Over the past few weeks, there have been several alarmist forecasts from international institutions such as the Organisation of Economic Co-Operation and Development (OECD) and the International Monetary Fund (IMF). These institutions fear the potential economic impact of a Brexit and they all agree that the consequences would be negative.
Osborne reiterated that, in the case of a Brexit, negotiating a new trade agreement with the countries of the EU would be “extremely difficult.” Osborne was targeting his message to those who have suggested that even in the case of a Brexit, London might still be able to renegotiate a strong position vis-à-vis its relations with the EU. (Source: “Post-Brexit EU trade deals ‘extremely difficult’: Osborne,” Channel News Asia, May 21, 2016.)
But the warnings are not only about the British economy. A Brexit, according to the world’s top economic authorities, would be disastrous for Europe as a whole. Indeed, it would affect the world economy as well.
In fact, if the U.K. were to vote to leave the EU, the world economy would experience a long period of heightened uncertainty, according to the IMF. The IMF reached this conclusion after its annual mission to Britain. (Source: “IMF says ‘very real’ Brexit risk could deal blow to world economy,” Reuters, April 12, 2016.)
The IMF sees the so-called Brexit as a potential cause of volatility in financial markets in the short term. The Washington-based organization also warns of long-term costs.
The Bank of England and the OECD have echoed the IMF’s fears. According to the central bankers of the United Kingdom, there are now increasing signs that the uncertainty associated with the Brexit referendum have already started to curtail economic activity. The economy has already slowed in the first quarter of 2016. (Source: “Bank of England warns Brexit could do serious harm to UK economy,” The Guardian, April 14, 2016.)
Some, however, suggest that the government and the international bankers have exaggerated the fears associated with a Brexit. They concede that there would inevitably be a period of uncertainty in the short term, but they are skeptical about the long-term negativity. (Source: “There would likely be a short term shock from Brexit, but the Treasury overdoes it,” Open Europe, May 23, 2016.)
Still, even the skeptics have little to offer but their skepticism, adding little by way of reassurance to the problem. The short-term effects of a Brexit could be dire indeed.