Although the UK is just beginning the process of leaving the EU, certain macro business truths are starting to emerge and one of the best gauges of how a country’s financial position and the outlook for its markets is the value of its currency.
How has the Pound done post-Brexit?
The Pound has been dropping against other leading currencies for what seems like almost forever, reducing the buying power of Brits overseas, but also making #exports less expensive. A lower value currency has many benefits, just look at China which unquestionably manipulates currency markets to keep its exports competitive.
On October 5, 2016, when Prime Minister Theresa May set a March deadline as the date to begin exiting from the EU (#Brexit), the UK Pound dropped to a 31 year low vs. the US dollar.
GB/USD is the symbol you will see in trading windows for the ratio of the Pound vs. the US dollar.
In the past year, the value of the Pound vs. the dollar began at $1.45/£ plunged 5-cents to $1.30/£ for a few months, held steady for a couple more months then dropped another 5-cents to about $1.25/£ near the end of October, and has held fairly steady for the last three months.
A drop in the Pound vs. the USD could reflect a loss of confidence in the UK economy, but it might have more to do with the value of the US dollar climbing because of interest rate changes.
A more accurate comparison according to many economists is the XAU/GBP ratio because, unlike the dollar, gold is not directly affected by US Federal Reserve interest rate or money supply moves.
Prime Minister May told Sky News on January 9, 2017, that the UK was coming entirely out of the EU, not just part way (soft exit), “We are leaving. We are coming out. We are not going to be a member of the EU any longer. We will be able to have control of our borders, control of our laws.” That day the Pound sterling dropped a full cent to below $1.22.
But, as of February 9, 2017, it was back to 1 £ = 1.25 $ ($1.25332 at 16:30 GMT.)
What's the outlook?
A Reuters poll of 60 foreign exchange experts showed that when Article 50 is triggered the pound sterling is going to drop another 5%, probably to about $1.15 (GB/USD.) The #pound sterling in recent times seems to move in 5-cent jumps.
However, what’s the story when you compare the Pound to gold? As many economists have said, gold is currency. Most countries, including the US and UK, don’t back their printed money with gold or silver as they used to be so they are fiat currencies. Fiat currencies always inflate, always eventually devalue, and always eventually collapse.
The value of the quid ranged from 845£/oz. on June 23 to 985.4£ today.(the £/ gold ratio is designated XAU/GB.) That means the value of the pound Sterling has gone up from the date of the Brexit vote until today as Article 50 gets closer to implementation.
Mid-December gold dropped to 910£/oz. but only for a brief period as gold dropped against many currencies just before Christmas (that means the £ sterling was worth more.)
So, while the sterling has moved around as far as its gold purchasing power, the Pound has traded in a relatively narrow range and today is very close to the same value it had on the day of the Brexit vote.
During the same period, the gold price in US dollars ranged from $1,300/ oz. on June 23 to a low of $1,130/ oz. in that mid-December drop. to $1,232 today.
All of that boils down to the fact that the value of the Pound Sterling has not been affected much or at all by Brexit concerns. From mid-2013 through mid-2016 the pound was worth less in terms of gold but starting about the time of the Brexit vote the value of the pound surged back to near the high point reached in 2011 which was the highest in decades.
What that will mean to bilateral trade between UK and US when the UK is fully out of the EU in two years won't be apparent until then because of many other factors, but a lower Pound vs. the US dollar would benefit UK exports.