Bloomberg via Getty Britain will have to reach a new trade agreement with the European Union following its decision to sever links with Brussels.
Editorials By Robert Brexit: The pound immediately plunged to its lowest in 30 years and has since suffered very large intra-day moves. The FTSE cratered before turning course and enjoying one of its best ever rallies to achieve a series of record highs in early All that before the process of exiting the EU had even started.
So what can we expect from the markets as the Prime Minister triggers Article 50 — the formal mechanism for leaving the club? In this paper we will look at some of the key ways in which exiting the EU will affect UK companies through the lens of the FTSE index of leading shares, and sterling via the pound-dollar exchange rate.
Here we look at two of the markets most exposed to the Brexit process: Cable is the chief bellwether for market sentiment towards the UK and how the country is prospering. Since the June referendum the pound has slumped to year lows despite the economy doing well.
Growth has remained resilient and the price action has been determined more by the politics than the data.
Inflation and Interest Rates. At the heart of the exit process will be how Britain extricates itself from the single market and renegotiates trade terms with the EU. Tariffs would make British goods more expensive, therefore sterling has to weaken to balance this out.
But there are also non-tariff barriers, such as customs checks, that could make the cost of doing business more.
To remain competitive the pound has to be lower. Examples of Tariffs on imports from outside the EU: Britain says it wants to strike bilateral trade deals with non-EU countries but it cannot do that unless it leaves not only the single market but the looser customs union.
To see why the trade issue is so important to trading the pound, we have to come back to the basics of how the balance of trade is related to the exchange rate.
Exports quarterly contribution to growth by commodity Currencies are affected by supply and demand and trade balances tell us how much demand there is for a particular currency. The more a country exports the greater the demand for its currency. This pushes up its value on the international markets as foreigners require more of the currency to purchase the goods and services it is exporting.
Of course when looking at exchange rates, we are in a sense looking into the future — what markets expect to happen. Therefore the fall in sterling can be seen as a simple recalibration of what constitutes the natural rate of exchange once Britain has left the EU — with the expectation that trading and transaction costs will be higher as British exporters become subject to new tariffs once outside the bloc.
Markets expect Brexit to cause this flow to dry up, meaning the pound has to weaken to redress the imbalance. It is also a recalibration based on the attractiveness of the UK as an investment location. The pound has had to fall in order to make UK assets attractive.9 days ago · The European Union is about to lose the United Kingdom, one of its biggest members.
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