The Impact of Brexit on the Euro and trade.
In Europe, the issue of Brexit has been a source of drama and uncertainty for almost
a year now, and many of the risks it presents are still unknown as we wait for
negotiations to end.
The main effect on the euro over the course of the last year is that it has been worth
considerably more against the pound. The euro now regularly fetches around 87p
and has been as high as 90p at times. However, before, the referendum prices were
closer to 86p to one euro.
Source: XE, Currency Chart 2019 www.xe.xom
This is more due to the pound dropping against just about everything in the wake of
the decision, rather than the euro looking stronger with Britain out of the EU, and
the euro’s price against the dollar has shown a different pattern.
The euro was able to buy $1.13 around the time of the referendum, but now, after a
low of $1.04 in December, it is pushing up around the $1.12 mark. What this really
means is that the euro’s buying power, both against the pound and the dollar, is
really more affected by the rises and falls of those currencies in the global markets
than by the events that triggered them which are BREXIT and US President Donald
Trump.
Europe was predicted to be in a position of uncertainty should Britain leave the EU,
with other countries at risk of following them. However, the recent election in
France mitigated a lot of global fears around this. Had right-wing candidate Marine
LePen won this election, it would have been very likely France would have taken
steps to exit the union, and this would have been likely to trigger the much talked
about ‘domino effect’ that analysts feared would be the end of the EU as we know it.
With Macron (French President) securing a big win, it has suppressed fears about
this and bolstered the euro. This means that the situation in terms of the pound to
euro exchange rate is now favorable for Eurozone countries and looks likely to
remain that way with the pound likely to remain depreciated for the foreseeable
future.
It is worth noting however, that the FTSE 100 (an index composed of the 100 largest
(by market capitalisation) companies listed on the London Stock Exchange (LSE) is
not strongly tied to the pound, and that the London Stock Exchange has not
progressed badly at all lately.
For both sides of the equation, a weak pound against the euro causes some
problems. For Britain, it means it becomes more expensive to purchase things from
Europe, and for Europe, it means that Britain will look to import less
from Eurozone countries, even before any tariffs following on from the trade
negotiations are imposed. This could be bad news for businesses that have a lot of
trade with Britain in the longer term. A lot remains to be seen about how Brexit will
affect the euro and what it will actually mean for businesses and individuals on both
sides of the English Channel. However, it can be taken as highly likely that the pound
will remain low against the euro for the medium term future, even despite any relief
rallies following the general election.