The Brexit result was a surprise for the global economy. A lot of financial and economic scenarios were discussed around the implications of the Brexit to the UK and its economy. A few thoughts follow about this significant event not only for the forex market but also the global economy during summer in 2016.
A weak Pound is both good and bad
The bad effects are that a weak currency tends not to attract a lot of foreign investments. Global funds are always looking for the best opportunities to invest assets and have the highest possible return. Since the Brexit result the Pound has lost a lot of value on a relative basis compared to two global and very important currencies, Euro and the US dollar.
There have been attempts for a recovery of the Pound in the forex market but rallies were weak and short-lived up to now. The scenarios of a possible recession for the UK economy have still strong arguments. However, last week a positive surprise in the numbers released about retail sales showed that perhaps we cannot make a precise forecast yet about the future of the UK economy and the strength or further weakness of the Pound.
The good news is that a weak currency can often help a country. Why is that? Mainly because exports of local goods produced are made cheaper and the cost of visiting the country or investing in assets such as stocks,bonds denominated in local currency, in our case the Pound is also cheaper.
An American or a European investor can buy more stocks listed in the FTSE with the same amount of capital. This is the result of the Pound and its depreciation on relative terms both for the Euro and US dollar.
What is the safest prediction to make about the future of the Pound and the UK economy? It is a very tough call and it is too soon to evaluate the financial, political and business decision made on 23rd June 2016.
It seems that we must evaluate in the coming months more financial data to reach any conclusion. We do not have yet enough information. If we could attempt to make a forecast with a conservative point of view and with globalization and its principles causing isolation of a country or a departure from a very strong community such as the European Union - it does not look good. But only time and future will tell.
