The British pound has stabilized after the initial shock of the June 23 Brexit vote. That stability was bolstered by two possibilities—that the United Kingdom (U.K.) would not go through with Brexit, or that the final terms would only be a modest change from the status quo, what has come to be referred to as the “soft option.”
It now appears that these hopes, always long shots in our opinion, are being dashed; as a result, the British pound has started to fall again, and is now at its lowest level against the U.S. dollar since 1985. Comments made by both British and European officials show they are staking out a harder line on key positions even before formal talks begin. U.K. Prime Minister Theresa May has stated that Article 50 would be invoked no later than March 2017, starting the two-year clock to finalize the true Brexit agreement. She commented that the U.K. was “not leaving the European Union (EU) only to give up control of immigration again.” Immigration was probably the most important issue to Brexit supporters, but is also considered one of the four freedoms of the EU. It will be hard, politically and ideologically, for the two sides to find common ground.
Adding to the pound’s decline were comments by the Chancellor of the Exchequer (basically the U.K. finance minister) suggesting that Brexit might be destabilizing to the economy. The Bank of England does have room to lower interest rates more, though as the figure shows, they are near zero. Zero, or even negative rates, would contribute to additional pound weakness.
If the title of this post sounds familiar, it’s from the 1985 song “West End Girls” by the Pet Shop Boys, a somewhat bleak exploration of the tension between posh, west end Londoners, who voted to remain in the EU, and the working class east enders, who voted to leave. Once again, life imitates art.
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