In June 2016, the United Kingdom shocked the world by voting to part ways with the European Union. The Brexit referendum sent markets across all asset classes reeling as it was a sign of rejection of the wave of globalism that had been growing in the world for over two decades. The British never wholly bought into the concept of a united European government that would take precedence over the political powers in the United Kingdom.
For two decades, the European Union has been a unifying force, but the individual cultures of nations within the supranational coalition have caused a rocky road at times. The fiscal austerity of northern countries has clashed with the south generating more than one sovereign debt crisis where the EU had to step on and bail out countries like Greece and others. At the same time, waves of immigrants from war-torn and dangerous countries in North Africa and the Middle East has been the subject of lots of conjecture among EU members. The Union took an open arms policy towards immigrants, and that is what likely led to Brexit as a small majority of voters rejected the concept of Brussels as the capital where domestic political decisions occur.
More than the English Channel separates the British from the rest of Europe. The culture of the British people and a long history of wars with France, Germany, and other European neighbors creates an air of distrust. When member nations of the EU abandoned their respective currency instruments, the U.S. said they would be a member but opted to retain the pound sterling as their foreign exchange instrument. Therefore, by keeping their currency, the U.K. maintained their sovereign identity.
The Brexit referendum was the first step when it comes to the actual divorce from the rest of Europe as now the country will need to negotiate all of the ugly little details concerning travel restrictions, economic cooperation, trade, and as well as a myriad of other issues. London is a global financial capital, and the U.K.’s participation in the E.U. only bolstered the capital’s position when it comes to Europe. However, as it every divorce, things will change for the U.K., and it is likely that many of the European financial institutions and other corporate entities will likely move their business to locations within the borders of the union in cities like Frankfurt, Paris, and other cities. The initial kneejerk reaction to the referendum in the U.K. almost two years ago caused their FTSE indices & other stock markets as well as their currency (GBPUSD)of the country to plunge.
As the chart of the U.K. equities index shows, it had been trading in bearish fashion since 2014 and hit lows just after the Brexit vote.
The British pound had also been falling, but on the night of the referendum, it tanked trading from $1.50 against the U.S. dollar to the $1.30 level and fell to $1.20 by early 2017.
Both the U.K. stock market and pound have recovered since the shock of Brexit, but the ongoing negotiations to exit the union are still a tricky issue that is likely to cause lots of volatility in the British stock market and currency markets when it comes to the pound sterling in the weeks and months ahead. Volatility in markets tends to increase opportunity for nimble traders looking for price variance. The British currency and equities in the country are likely to respond to the ebbs and flows as divorce proceedings continue over coming weeks and months.