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Brexit Fears Give Sterling The Jitters


Image source: Tony Baggett / Shutterstock.com

What's going on?

The British pound hit an eight-week low on Tuesday (versus the US dollar) after the UK took another step toward formally leaving the European Union (EU) – and Scotland’s government pushed for its own independence referendum.

What does this mean?

On Monday evening, the UK Parliament granted the Prime Minister authority to pull Britain out of the EU. Crucially for investors, Parliament didn’t include a provision that would have required it to approve the final exit deal with the EU. In effect, this would have been a veto – and, in the eyes of many investors, it would have made a “softer” Brexit more likely because Parliament appears to favor fewer changes to the existing relationship than the Prime Minister does.

News of the Scottish referendum had broken during market hours on Monday and didn’t have the same negative effect on the pound. This suggests either that investors expected it to occur and/or that it is, for now at least, less important to them than the Brexit negotiations.

Why should I care?

The bigger picture: Brexit’s a huge deal for the UK and important for the EU, but elsewhere investors aren’t too bothered.

Prior to the Brexit vote, investors around the world were wondering how a “Leave” vote would affect them. As it turns out, there was very little impact. Even within Britain, the effects have been far more muted than anticipated. But this could change as Brexit becomes more of a reality. For example, the final deal could create greater barriers to trade between Britain and the EU – which would likely be bad for both economies (although probably worse for Britain’s). For the rest of the world, however, the impact appears likely to remain marginal.

For markets: Brexit will likely fade from focus until after the key European elections.

There are a number of major European national elections looming over the rest of the year, including in France in the spring and in Germany in the fall. Brexit negotiations – and associated market-moving headlines – seem unlikely to kick off in earnest until those elections are over (because Europeans will be focused on their own elections).

Originally posted as part of the Finimize daily email.

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