Brexit: The Pound Will Survive, The Euro Will Not

Lior Alkalay - INO.com Contributor - Forex


Friday, June 24th will be remembered as a Black Day for the British Pound. On that day, investors, shocked by the “leave” vote for Brexit, pushed the Pound off a cliff, toward its worst daily loss since 1985. And yet, despite the Pound being at the eye of the storm after the Brexit vote, it’s not the Pound’s future that investors should fear.

Brexit Impact On The Pound Sterling

The impact Brexit will have on the Pound should be divided into two ranges—short to mid-term and long-term.

In the short to mid-term, it’s undeniable that the Pound will face significant and broad pressures—monetarily, fiscally and economically. The Bank of England will likely need to deploy extra liquidity measures to assure stability in the financial system which, effectively, is monetary easing. From a political standpoint, uncertainty has increased dramatically. On Friday, the UK Prime Minister, David Cameron, resigned, and his “heir apparent” is still unclear. But even more, troubling is the future of Scotland within the United Kingdom. The Scots will be compelled to cast another vote, this time on their willingness to leave the United Kingdom and stay with the European Union.

Of course, from an economic standpoint, uncertainty will transform into lowered confidence. The UK real estate market, which is dominated by foreign investors, will be under pressure. Moreover, consumer spending is likely to drop quickly. Adding it all up, it’s undoubtedly negative for the Pound and will weigh on the currency for a while.

Over the long term, however, the picture seems much brighter. Once the shockwaves fade, the tide for the Pound should turn favorable. As the EU is likely to continue to remain unstable, the Pound Sterling will become less and less exposed to the EU. In time, it could, in fact, turn into a safe haven currency. Inflation is likely to be higher and will warrant a tighter monetary policy from the Bank of England. As far as trade goes, the business community is likely to push hard for “business as usual,” which will allow the UK to keep trading with the EU in large volumes. The difference is that now, UK businesses will have no EU “red tape” hurdling them. All of that will allow the Pound to eventually recover, although that recovery might come slowly and only after plenty of choppiness.

Euro’s Future At Risk

Although the Euro took a much shallower plunge than the Pound initially, over the long run the Euro has likely already received its “knockout blow.” The departure of the United Kingdom from the European Union is a clear signal that the Euro is reversible. Although there is a distinction between European Union members and Eurozone members that are all denominated in Euros, it’s hard to see one surviving without the other. If the European Union could unwind, so can the Eurozone, and if the Eurozone can unwind then the Euro can unwind, too. Risk premiums across European bond markets and money markets will have to move higher and higher, and integration across the EU will weaken. Stake it up with a rigid regulatory environment and weak economic performance and the incentive for other EU members to leave will grow with time, and there is nothing that the European Central Bank can do to stop that. It might not happen today or tomorrow or even this year, but every crisis will incentivize one member or another to contemplate leaving. And under such circumstances, it is hard to see how the Euro’s long term path will be anything but south.

Look for my post next week.

Best,
Lior Alkalay
INO.com Contributor - Forex

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

16 thoughts on “Brexit: The Pound Will Survive, The Euro Will Not

  1. Have any of you considered that as yet Brexit has not taken place, merely an opinion has been asked for and obtained.
    The EU ,Commissioners do not want, will not allow an exit by any nation.
    This is no more than a charade to totally illustrate to any would be exciters,
    Just what terrorism they can and will be subjected to.
    What is happening now is simply the charades enactment,and will end as an All's well that ends well.!!

    1. The only person who can exercise Article 50 is the Prime Minister of the UK at the time. Yes, the referendum was only advisory but in my opinion it is completely unrealistic to expect a Prime Minister to go against the expressed will of the people. Yes, both campaigns were appalling. Yes, people should learn to vote if they want to influence outcomes and not to make protest votes if they might regret the outcome. If the people have shot themselves in the foot, however, they will remain shot in the foot.

  2. Scotland can veto brexit! I think this is the most likely outcome because then nobody looses face.
    But uncertaincy will not disappear, because it is not only GB that is unhappy about "one size fits all" policies.
    I see a EU with the founders going all in with more federalism, just to save the euro. The rest of the memberstates will get less regulations pulled over their head or none at all. The EU as we know it today is doomed (as well as the euro).

    1. Scotland cannot veto Brexit. It can formally express its disapproval but that does not prevent the UK giving notice that it wants to leave the EU. I agree with you about the EU and the Euro but after a second Scottish independence referendum and Scotland being forced to adopt the Euro on re-joining the EU Scotland may be the most doomed member. I will probably move back to England after 32 (up to now) happy years in Scotland, to protect my pension funds and property value.

    1. there is an underlying impression that the Greeks do not really want to repay the loans they've had from the EU, and now they see Britain has exercised article 50 of the EU treaty, it is very likely they we do so also, sometime soon,and default on the loan repayments. therefore, the Scots will find themselves dragged down a slippery road if and when they go it alone for the sake of joining the EU. only time will tell. Britain, (if not the UK) can begin to prosper again, but after what damage the members of the EU will inflict on British trade/commerce out sheer anger, because the EU would have been stronger had UK remained, is something to work through. But, they (EU) will weaken their authority by acting so bitterly. thus, the above article is correct; other member countries will follow suit. I had hopes we would have stayed in, and avoid all this .

      1. I too hoped that we would have stayed in, John, but by such a slim majority that the EU would have been so frightened of another UK referendum that it would have rapidly reformed in the right direction.

  3. George M.

    Your whole article is a premise based on personal prejudice and bias. With Scotland and Ireland (Northern) wanting to move away from England and the "UK", they will be left on their own. Their arrogance that they know best and have never fully committed to the EU nor anyone but themselves will give them full chance to show how capable they are (or not) to do all that needs to be done to keep them going. On the other hand, the EU is committed to their community and direction. The real powerhouse in the EU has never been Britain in the first place nor right before the exit.

    1. You are presumably talking about the "arrogance" of the English and now it seems the Welsh, not the Scots and Northern Irish. They have been very committed to the EU. Of course the powerhouse of Europe is Germany and was going to remain so unless the UK's economy became larger than Germany's, which it was on trend to do. That powerhouse however is surrounded by countries needing money transfers under the disastrous Euro scheme that the powerhouse does not want to pay. Before the Euro was introduced Northern Italians resented the money transfers flowing to the South. Even the Italian Lira was a failed single currency. The EU should have taken note of that.

  4. I do not agree with the above two comments. The article makes a lot of sense, provided, I would add, the UK embraces the free market and gets rid of big government and regulations the causes she left EU in the first place

  5. They will both survive. You keep confusing the Eurozone with the E.U. once again. They are two totally different things 🙂

    1. Dear Petros,

      Thank you for your comment, but there is no confusion.
      The article clearly states the difference between Eurozone countries that use the Euro monetary system. But the point here is that the Eurozone is reversible just like the EU.

  6. This over the counter statement is not factual.

    It is too theoretical to be of any value.

    Strictly speaking no one can foresee the financial outcome of all this.

    One cannot speculate so far into the future.

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