The shock outcome of the 2016 Brexit referendum sent the pound spiralling. Whilst some polls had shown a small advantage for the Leave campaign in the days up to the vote, few in the financial industry believed Brexit could happen, and so when the results came in at 51.9% for Leave and 48.1% for Remain, Sterling plummeted.

In the hours after the results, the value of the pound fell by more than 10%, and the constant uncertainty since has meant even two and a half years after the referendum, GBP is still lower against the Euro and the Dollar it was pre-referendum.

Over the past 30 months, every step towards the cliff edge of Brexit has caused further volatility to GBP. When parliament voted to invoke Article 50 and start the Brexit process, GBP dropped 0.7% against USD. And on 29 March 2017 when Theresa May signed the letter invoking Article 50 and sent it to the EU, setting a two-year clock to exiting the European Union, GBP fell a further 0.3%, extending post-Brexit Referendum losses to 17.5%.

Financial markets crave stability, and whilst all signs point towards Brexit damaging the UK economy, traders did see the possibility of stability returning to the UK when the PM announced she had reached a divorce bill with the EU, GBP rallied 0.6% against the USD. Whilst some complained the divorce agreement would still leave the UK paying £39bn to the EU to cover its past commitments, the alternative of leaving without a deal would lead to “instant, harsh consequences” for the UK, with the government’s own estimates saying UK growth would be 8% lower over the next 15 years.

The next stage of negotiations was the transition period. And again as agreement was found for a 21 months transition to smooth the frictions of trade after Brexit, the markets reacted positively to the perceived reduction in uncertainty. As news of the deal broke, GBP gained 0.9% against the USD, and 0.7% against the EUR.

However, despite this apparent progress in negotiations with the EU, May has consistently struggled to maintain control of her party at home. May has faced a series of resignations from her cabinet throughout, with every agreement with the EU overshadowed by a resignation from Brexiteers such as Boris Johnson, David Davis, and Steve Baker, who claim the PM has capitulated to EU demands. The fact that they were part of the negotiating team for these negotiations has never seemed to concern them, as they were forced to confront the harsh reality that the Brexit they had dreamed and campaigned for was a fantasy and uniquely damaging to every sector of the UK.

The Withdrawal Agreement has proved particularly difficult for the prime minister. Her so-called “Chequers” plan that had caused many of the resignations from her cabinet was not popular with EU leaders either, with plans for a border on the island of Ireland proving particularly troubling. These struggles to find common ground on the Irish backstop and other problems about division of the Single Market resulted in a failure to find agreement at the Salzburg summit, and GBP to fall 0.4% against the USD.

No-deal Brexit loomed. As May made further concessions to try and find a deal, divisions within cabinet ministers were becoming more pronounced. And as tensions heightened, Pensions Secretary Esther McVey and Brexit Secretary Dominic Raab both resigned, causing GBP to collapse 2% against USD. The concessions were not popular with Conservative MPs, but they did convince the EU to come on board with the deal at the Brussels summit at the end of November 2018.

However, the deal she agreed has not been popular at home. The Labour party, along with the SNP, Liberal Democrats, and the Greens have consistently opposed May’s deal as it will negatively impact UK businesses and families. And the Tory party are split with two-thirds of MPs supporting the deal, but a third opposed as it is includes what they say are too many concessions to the EU. Parliament, then, is overwhelmingly against the deal and it has been defeated three times.

If Theresa May had managed to get her deal through parliament, the transition period for the UK leaving the EU was due to start last Friday (29 March 2019) and last until 31 December 2020. However, after her deal was defeated for a third time earlier today, uncertainty is back with a vengeance. The short extension agreed with the EU means that despite parliament voting overwhelmingly against a no-deal three times, the UK is due to crash out to the EU without a deal on 12 April, in just 12 days’ time. Uncertainty and market volatility is back.

How politics affects finance markets

As May’s failures over Brexit have shown, the actions of world leaders can have a dramatic impact on the currency markets around the globe. Here are three other recent examples:

Trump’s Tariffs (September 2018)

Trump announced $200 billion worth of tariffs on Chinese goods, threatening to add hundreds of billions of dollars more if China did not change its trade and intellectual property practices. Although we saw a slight rise in the EURUSD currency pair, the most popular currency pair in the world, sharp falls followed in the immediate days following the announcement.

US political impasse and government shutdown (December 2018 – January 2019)

The US has had a number of government shutdowns over the years with the president and congress failing to agree, but the Trump shutdown over funding for the border wall lasted longer than any before and caused significant volatility on the financial markets.

Sanctions after Russian invasion of Ukraine (2014)

Under the guise of a popular uprising, Russia invaded Ukraine in 2014 and seized Crimea. In response, the US and EU imposed a variety of sanctions on the Russian economy and specific Russian oligarchs and those with connections to the Putin regime. The sanctions, alongside a fall in oil prices, pushed the Russian economy towards recession in 2015, and caused the Ruble to collapse against the USD.


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