Why the British pound matters
If Brexit causes money to drain out of the U.K., a declining pound — the fourth most traded currency in the world — would ripple through currency markets
By Kathy Lien, For CME Group
Why the British pound matters
If Brexit causes money to drain out of the U.K., a declining pound — the fourth most traded currency in the world — would ripple through currency markets
By Kathy Lien, For CME Group
The British pound has always been extremely important. It is the oldest currency in the world that is still in continuous circulation[1].
There have been a lot of ups and downs in its 1,200-year history but the pound, commonly known as sterling, is the fourth most actively traded currency behind the U.S. dollar, euro and Japanese Yen.[2] With a well-developed English-speaking financial market, the U.K.has long been a popular investment destination. While the London Stock Exchange is only the world’s seventh largest exchange,[3] London is the world’s leading foreign exchange center with nearly double the daily foreign currency turnover as New York.
Sterling’s investment impact
On a practical basis however, sterling’s impact on investments depends on the percentage of sales that a company does in the U.K. If the amount is limited, say, less than 15 percent, the rise and fall of sterling will only affect earnings in a minor way. However, if the company has significant business abroad in the U.K.— in excess of 30 percent for example — then a stronger pound will translate into higher earnings for the American business. A weaker currency on the other hand will reduce the value of U.K.-based earnings. So if you’re investing in a company with U.K. exposure, watching the currency is important.
The Brexit effect
Aside from the makeup of sales, the greatest impact that sterling and the U.K. economy have on the U.S. and other economies comes during times of instability. In June 2016, the UK voted to leave the European Union[4] and since then they have been mired in Brexit uncertainty. This risk is expected to drag on for years to come and could have a real, potentially devastating impact on Britain’s economy as instability in U.K. markets translates into instability for the rest of the world.
If an unruly Brexit causes money to flock out of the U.K., we could see markets and sterling come tumbling lower. There could also be major stress for U.K. banks that would force the Bank of England to provide stimulus. London is the home to some of the largest banks in the world, and in the worst case scenario, we could see U.K. bank failures with global repercussions.
If sterling crashes, the biggest beneficiaries will be the euro and U.S. dollar as investors escape into the safety of assets in the U.S. and continental Europe. From proximity alone, German, French and Eurozone investments would be the biggest beneficiaries of Britain’s plan to leave the European Union.
Financial technology could be hit hard
But there’s one sector —financial technology, or “fintech”— that could be hit particularly hard by increased regulatory hurdles and the loss of EU trade benefits. Startups in this sector, and many sectors for that matter, may realize that it makes more sense to set up their offices in the EU over the U.K., which in the past had received major fintech investment.
Brexit is a serious issue that concerns policymakers and business managers around the world, and it’s expected to haunt investors for years to come.
Learn more about British pound futures and how to trade them.
Sources: The Telegraph, Action Forex, ValueWalk
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