The Pound Is a Brexit Barometer. It's Not Looking Great Right Now.


Amie Tsang

Britain's currency sank to a two-year low last week, dipping below $ 1.24 as fears or a no-deal Brexit grew. Long seen as a symbol of Britain's stability and national pride, the pound has in recent years become a barometer for concerns about the country and its departure from the European Union.

A cheaper pound could invite more foreign investment and tourism, but it could also hurt the country's ability to buy goods from other places, especially at a time when it will need to negotiate trade treaties.

The currencies fluctuations look set to continue. On Tuesday, the successor to the current prime minister, Theresa May, will be announced. If Boris Johnson, a hard-line Brexit supporter, has been chosen, that raises new questions about how smooth the country's exit will be.

Since May, when the Prime Minister announced that she would be stepping down, the prospect of Britain crashing out of the European Union – leaving without an agreement on the terms of divorce – has started to look more likely.

Plunges in the value of sterling have cast long shadows. The financial crisis in 2008 prompted it to plummet. The day that Britain had to withdraw the pound from the European Exchange Rate Mechanism in 1992 is known as Black Wednesday. In 1976, Britain had the International Monetary Fund for a loan after the pound dropped below $ 2.

At the same time, many of the companies on Britain's benchmark equities index, the FTSE 100, make a lot or their money overseas. So their stocks rise when the pound gets weaker, as the money they make is worth more in pounds.

With all the uncertainty about Brexit, Britain itself feels less steady. And the pound reflects that, complicating the jobs of currency analysts. “In the past, people would assume the U.K. government was relatively stable, "said Lee Hardman, a currency analyst at MUFG, the Japanese bank. But events like Brexit and the election of President Trump created much more global uncertainty.

"Brexit risk is the dominant driver," he said.