Within the past couple of years, everyone in Europe and probably the world must have heard at least once the word “Brexit”.
This divorce between the United Kingdom and Europe has been trending all over the media, and it changes so frequently, people don’t know what the future holds.
Opinions vary when it comes to Brexit, and London-based companies worth millions have been struggling with relocation issues and must make important business decisions.
This whole situation, however, does not only affect Europeans or people living and working in the UK.
It affects the economy of the whole world.
The Brexit Forex impact is much larger than just the British Sterling, and both the euro and US dollar can be negatively affected by these changes.
So how are the two most popular trading currencies affected by the UK’s decision to leave the EU?
Let’s take a look.
Brexit’s impact on the United States
This year on the 17th of October, both the UK and the EU agreed on a new Brexit deal. When this happened, the EUR-USD exchange rate rallied sharply.
However, this doesn’t mean that the negative news and headlines on the subject of Brexit won’t drag the exchange rates lower.
Rewinding back in June of 2016, the Brexit referendum managed to affect the financial markets all over the world, and all main US stock indices witnessed losses over 3%.
Unfortunately, there USD’s “fate” depends on whether the UK will leave the EU with a deal, or without a deal.
A no-deal Brexit would have as a result the increase of the USD value significantly compared to the euro and the Sterling.
If this actually happens, a business selling goods from the US to the UK or Europe will face many difficulties.
The reason behind this is that if the dollar is stronger, the goods sold from the US will be more expensive to buyers holding pounds or euros.
As a result, there will be fewer sales for the business.
Just like a domino effect, fewer sales will eventually bring a negative impact on the company, which will possibly bring the reduction of staff, and then this will result in higher unemployment or even closure of the business altogether.
Even with the best scenario in mind, since US companies have operations in the UK, it is inevitable to not experience some kind of disruption in the supply chain.
This could result in high costs paid by American businesses in order to function.
On the other hand, the whole idea of Brexit is the disruption of globalization in the country.
Therefore, since the UK wants to step down from the international finance market, this could be giving the US an advantage by turning it into a more attractive financial centre.
Unfortunately, since Brexit is still being discussed and nothing is official just yet, we can only look at theories of what could potentially happen.
Either way, the US will have some sort of difficulties to face since they also have ongoing trading disputes with China at the moment.
Brexit’s Impact on the US Dollar
It is difficult at this stage to be precise regarding the USD’s future when it comes to the Brexit issue.
This is because as circumstances change, the exchange rate also changes.
Just a couple of weeks before the Brexit referendum, the dollar was around $1.46 against the pound, and after the referendum was $1.30.
In October of 2016, the no-deal Brexit rumours created fear which resulted in the pound USD exchange rate to drop to a low of US$1.1650.
Whereas in October of 2019, the pair between them went to $1.29, on hopes that a deal between the UK and the EU would be compromised.
In the case of the USD and EUR, there were similar ups and downs.
Weeks prior to Brexit, the dollar was around $1.1470 against the euro, and then after the referendum, it went to $1.1060.
In January of 2017, the EUR – USD exchange rate was at $1.03, and then back to $1.11
Now in December of 2019, the UK stocks and pound shot higher after the Conservative party and Boris Johnson secured an election victory.
Johnson’s Conservatives have won at least 326 seats “” enough to guarantee a majority. Exit polls predicted that he would win 368 of 650 seats in parliament.
This victory suggests that the UK will be leaving the EU soon, and most probably with a deal.
The pound strengthened 2% to $1.342 at 3:10 a.m. ET, its highest level since May 2018.
The reason the USD increases at the timing of the Brexit no-deal is because the US dollar has been considered to be the reserve currency of the world.
This means that during risky times, investors look to buy into safe havens, such as the USD.
Whereas when it seems like the UK and the EU will have a divorce on good terms, investors no longer feel the urgency to seek out USDs for “safety”.
Brexit’s impact on the EUR
Moving onto the Brexit’s relationship with the euro, it was obvious that after the referendum in 2016 the euro declined compared to the dollar.
A similar change was also witnessed when Boris Johnson announced a new Brexit deal, which made the euro a lot higher than the dollar.
So basically, when good news surrounds the whole Brexit-issue and the possibility of a deal, the euro increases compared to the USD but falls compared to the sterling.
Whereas when no-deal rumours surface, usually the euro decreases compared o the USD but increases in value compared to the sterling.
This happens because the sterling is being constantly affected by Brexit developments and procedures.
Since Brexit has an impact on the Eurozone economies, the euro also moves up or down depending on these same developments.
Similarly to the US, a no-deal Brexit could be disastrous for the EU because this would create uncertainty and risk in its economy. Whereas a Brexit deal would reduce these scenarios.
As we mentioned previously, the Conservative party has won over the majority of votes in the latest elections in December 2019.
After these results came out, the pound strengthened 2% to $1.342 at 3:10 a.m. ET, its highest level since May 2018, and it also rose 1.6% against the euro.
The fact that the Conservatives will have a solid majority in parliament, Boris Johnson has promised to take the country out of the EU by January 31st.
This removes some of the Brexit uncertainty that has hung over businesses and the economy for more than three years.
The Broker’s Opinion
Brokers all over the world have been keeping an eye on the Brexit progress, advising their customers on their next steps.
But what do they think about the whole FX-Brexit situation?
Speaking with Forbes.com, George Karoullas, CEO of EverFX official, stated: “The whole Brexit debacle has spread a feeling of uncertainty across all industries and economies in Europe, and the trading vertical is not an exception. We consider the UK one of the most lucrative, interesting, and challenging markets in the world, and were thrilled at exploring what it has to offer.“
In the case of EverFX, their aim is to empower their clients with the necessary tools, knowledge and support in order to enjoy and excel in their trading endeavours, pre and post-Brexit.
“Headed towards the nearest Brexit”
Both EUR and USD investors are waiting to see the final outcome of Brexit in the next month.
Leaving with a deal means that there is a transition period within which businesses have time to adjust their operations.
A no-deal Brexit doesn’t have this transition period. From one day to the next there would be a cliff-edge change.
For the time being, it seems like a deal will be taking place due to the Conservatives’ majority in parliament.
Unfortunately, nothing is certain until the 31st of January but hopefully, we will have a clearer image of the situation very soon.
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