I made this video in 2017, a year after the Brexit vote. In 2020, the Brexit chaos still continues and the exchange rate of GBP did not recover to its pre-referendum value. The reasons below are still relevant to explain the current weakness of the GBP.
In this video, I answer the following questions:
1. What is an exchange rate?
Exchange rate is the value (or price) of a currency compared to another one.
2. What determines the exchange rate?
The market: Supply and demand. When there is a strong demand for a given currency, this currency appreciates, vice-versa.
3. What happened to the exchange rate British Pound (GBP)?
The British Pound (GBP) has strongly depreciated right after the Brexit vote, up to 20% against the euro for instance. The exchange rate of the pound did not recover to its initial value since then.
4. Why has the British Pound depreciated?
3 mains reasons explain the deprecation of the GBP:
Reason 1: The UK economy is expected to be POORER and LESS PRODUCTIVE in the coming years, compared to the situation where it stayed in the EU.
- The UK has significantly benefited from the access to the EU Single Market. Being a part of the European supply chain enabled UK producers to produce in a more efficient way by cutting production costs.
- The reestablishment of border controls and custom duties would make the UK LESS attractive for foreign investors and diminishes demand for GBP.
Reason 2: Monetary policy: Low Bank of England policy interest rates
- Investors tend to buy assets of countries that offer high interest rates (and high returns). Therefore, high policy interest rates increase the demand for the currency of this country.
Reason 3: UNCERTAINTY around the future UK-EU relationship
- Markets DO NOT LIKE uncertainty! Investors prefer to invest in other countries than the UK and this lowers again the demand for GBP.
I hope you find the video helpful. Please leave me a comment to give me feedback or further questions.
If things works well, I would like to come back with new videos on “low interest rates and the policy challenges” they imply.
SEE YOU SOON?