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The story of the diminishing value of the pound
On 29 June, the United Kingdom voted to leave the European Union. This Britain Exit (aka Brexit) is predicted to have effects on trade, commerce, tourism, real estate and education sectors to name a few.

The immediate effect though, was the falling  value of the British Pound Sterling (GBP) within minutes of after the poll results were announced. In July, the GBP fell to a 31 year low of $1.30 (or INR 86.60)! Economic analysts then proclaimed that the worst is yet to come.  The immediate effect of this drop being British commercial property funds immediately suspended trading.

Read on to find out how the value of the pound has fluctuated over the last three months! 

 

Why does money fluctuate?

Going back to Economics 101, the value of a currency is determined by a country’s growth rates, interest rates of central banks and inflation. When an economy is doing well, the population wants to invest in the country that has a strong currency and will in turn increase demand of local currency. In times of volatility, the economic scenario is uncertain with the population opting not to invest or rather ‘take their money out’ of the country. 

The talk around Brexit was on since former British Prime Minister David Cameron took over office in 2012. Early 2016, the mild drop in value was becoming clear. 

 

Flash crash 

The week of 10 October 2016, the GBP witnessed a novel ‘flash crash’ in rates with the currency depreciating by 4.2  per cent that week. The rates recovered two thirds by the end of the work day. The reasons for this flash crash are still being analysed by the Bank of England, but speculations include algorithmic errors in the electronic trading platform and French President, Francois Hollande’s strong comments on Britain leaving the EU the previous day. This dip, though temporary, led to fluctuations in market prices and drop in confidence! 

 

Effects of the fall of the GBP 

The initial fall of the GBP had led to a plethora of predictions.  For instance, a weaker GBP implies that oil prices will go up as Britain trades oil in USD. At the same time, it was predicted that, for exporters, this fall in prices comes as good news boosting growth and increasing competition. 

A recent report by Deutsche Bank highlights how in this generation trade does not comprise only of final consumption goods but of large number of raw materials. Therefore, while the final goods would be cheaper, more would still have to be paid on the imported raw materials. Travel outside the UK for British citizens comes at a cost due to the fall in the pound and real estate value within the UK has fallen.  Britain seems to be a haven for international shoppers with luxury goods such as Burberry reporting increased sales of their signature products. At the same time, the aviation industry is bearing the brunt of the fall, with low budget popular airlines such as Ryan Air seeing cuts in profits. 

The fall of the GBP was a side effect of the Brexit. It is expected to fall further and sta- bilise only in November 2020, after Article 50 is invoked and the exit of Britain from the EU is initiated. Some economists point out that the GBP was anyway overvalued and that the UK was running a deficit between imports and exports – 7 per cent of GDP. What happens and how it affects the economy and trade is something we will have to closely watch in the years) to come!

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