The British pound had suffered immensely since the United Kingdom voted to leave the European Union. The two Downing Street successions were immediately followed by the COVID-19 pandemic that has affected the whole world and is reflected in the currency exchange market.
But why did Brexit affect the British pound and euro so much?
Numerous factors can cause currency exchange rates to dip. Two of the most damaging reasons are lack of political stability and recessions caused by uncertainty in the environment. And merge this with traders favoring political data instead of economic data.
Historical Performance of the British Pound vs. Euro
For two decades, two significant events affected the values of the pound and the euro. They are the financial crash back in 2008 and the United Kingdom voting to leave the European Union in 2016.
From 2008 to 2009, the European officials thought that the impact of the Lehman Brothers collapse would only be felt within the United States. But after a few months, the ramifications of the events spread through Europe.
From 2010 to 2011, there was a minor recovery felt, then another dip happened four years after until its slow recovery in 2015.
Before the 2016 referendum, economists had speculated about the lasting damage of Brexit to the economy. These speculations were evident in the market because just 24 hours after the UK announced they would be leaving the EU, the British pound fluctuated against all major world currencies.
This event recorded a new low against the US dollar, which is a first in 30 years.
In 2019 and 2020, the British pound’s strength increased following the result of the UK General Election in December 2019, and it soars to its highest level against the euro since 2016. The coronavirus pandemic has skewed the currency performance in the past year.
Despite this, the euro saw great results in 2020, with its progression linked to other currencies’ international affairs. Following the first lockdown in the United Kingdom due to the coronavirus pandemic, the euro surged to its highest level against the British pound.
Effects of Brexit on the British Pound and Euro
Since both the British pound and the euro are free-floating, the two currencies’ respective values are determined by the supply and the demand of traders.
Although it is beneficial, currencies are at a disadvantage because of the uncertainty of daily value changes. Since 2016, nothing has been more uncertain than the UK leaving the EU to be independent.
Due to its close relationships with numerous nations, the euro is affected by fiscal policies, politics, inflation, economic performance, and interest rates of the 19 member states considered eurozone. Euro is also affected by nations that are outside the borders.
The data from 2017 show that the United Kingdom was the second-biggest net contributor to the European Union’s budget, meaning that it has put in more than it was able to harvest from it. The removal of the European Union reduces the pot, and it could cause more instability across the EU.
As for the British pound, it is possible that there would be a struggle after the Brexit deal since the independent United Kingdom may be plagued with debt and recession.