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Brexit: What's next for the GBP?

The immediate shock response that followed the UK’s vote to leave the European Union (EU) is beginning to slightly settle. Despite public backlash, the creation of a number anti-Brexit and other Facebook groups and the circulation of a petition calling on the government for a second referendum, a Brexit is going to occur, whether we like it or not.
 
With a nation divided in terms of whether this is a positive for the country, many businesses and investors are worried as to what this will mean for their sector. With the prime minister's resignation and the sterling plummeting to lows not seen for 31 years, it's completely understandable to be worried about what the future holds for the country and the GBP.
 
Even in the run up to the EU referendum, with such uncertainty in the market, the pound suffered, as experts held off any investment by adopting a wait-and-see approach until after the now historic date of June 24th.
 
It was perhaps inevitable, then, that with Brexit, a drop in the market would come, with such uncertainty for the future of Britain confirmed. But now, almost two weeks after the result,  there are a number of questions residing in the minds of investors - what is next for the GBP? Will it recover? Or are we heading for yet another recession? And could, in fact, Brexit be a good thing for the UK’s economy, in the long run?
 
Here we take a look at what the future could hold for the GBP.
 
Low financial stability
 
This week, sterling fell as low as $1.28 against the US dollar overnight following warnings from analysts about the financial stability of post-Brexit Britain. With this, further bad news came for investors, with banking firm Goldman Sachs alerting the market by claiming that the pound could in fact fall further, to lows of $1.20 against the USD in the next three months.
 
Such levels have not been seen since the summer of 1985, with further central bank announcements about interest rates likely to contribute to the weakening pound in the coming week. 
 
In a note to investors, as reported by the Independent, Silvia Ardegna, an executive director in Goldman's macro and markets research team, commented on the going-ons in the current market.
 
"Now that markets have settled somewhat, we are switching to forecast a second leg of weakness for the pound, as the Bank of England’s policy response drives the currency weaker.
 
"Next week, we expect the [Bank of England] to provide a further indication of the scope of the conventional and unconventional monetary policy measures we expect. This will be the catalyst for a further downward move in sterling."
 
Bank of England
 
The value of the pound also took a hit in response to a warning from the Bank of England that the EU referendum result had already began to impact on the financial stability of the UK, with some risks beginning to crystallise.
 
Currently the pound is regarded as a high risk asset, and with this comes a market sentiment that is very risk averse, causing increased pressure within the market.
 
And uncertainty within the UK’s economy isn’t being helped by the current Conservative party leadership contest, with Boris Johnson - the Leave party’s biggest campaigner - dropping out of the running. In addition to this, Theresa May, one of the most likely candidates for the role, fuelled the worry of EU migrant workers living in the UK this week by refusing to rule out the deportation of EU nationals.
 
Or the end of the crash?
 

However, despite best attempts from the headlines, it isn’t all doom and gloom for the UK. Although the GBP is at a risk of undershooting, as long as the decline in the pound does not trigger further UK asset price weakness and volatility elsewhere, local authorities should be fine with a lower GBP, according to Morgan Stanley.
 
The financial services industry even believes that front-loaded GBP weakness could perhaps be beneficial to the UK. Such weakness could allow the pound to generate inflation expectations that, with lower nominal bond yields, could create real yields to low enough levels to support investment picking up.
 
Further to this, the Bank of England’s financial stability report confirmed that any reduction in strength of the country’s financial conditions would see the bank easing.
 
With a situation so unique, it’s hard for investors to predict the events that will befall the market in the coming months. One thing that is for sure is that the value of the pound will continue to fluctuate as it fights to regain strength. 

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