In February 2022 the pound reached its highest point against the euro since the Brexit referendum in June 2016. What were the highs and lows between the two, and why? And what can these events tell us about managing currency risks today?
2016 to 2017, Referendum aftermath
After the referendum result in 2016, sterling experienced its largest fall within a single day in 30 years.
Although it made a partial recovery, Theresa May’s disastrous early general election gambit in 2017, which resulted in a hung Parliament, led to a long, slow decline of over 10% between April and August. It had been an attempt to ‘strengthen her hand’ for upcoming Brexit negotiations, against what she saw as a weak opponent in Jeremy Corbyn, but instead her small majority in the House of Commons was lost, despite the polls consistently predicting otherwise.
Against the US dollar, interestingly, while the six months after the referendum saw GBP/USD fall by 20%, the 18 months until April 2018, were one of almost constant strengthening. The period included Donald Trump’s early presidency and tensions with China and North Korea. GBP/USD almost recovered the losses since the referendum, before declining to the lower reaches of the entire 2012 to 2022 period at around $1.20 by summer 2019.
6 events that moved the pound in 2019
In a volatile year of political uncertainty, with the real possibility of either a new referendum or leaving with no deal, sterling hit new lows against the euro and the US dollar in August 2019. Here is how it happened:
March: MPs reject Theresa May’s Brexit deal (“Withdrawal Agreement”) for the third and final time – intense daily volatility but little clear direction
May – August: Following poor local election result, Theresa May announces intention to resign – pound begins rapid descent as Boris Johnson begins premiership, hitting €1.064 in August
August: “No deal” preparations begin amid arguments over Northern Ireland backstop. Despite this, the pound begins recovery
September: Legal arguments over the prorogation of Parliament – sterling drop 2% on Supreme Court ruling.
October – EU leaders agree to ‘flextension’ until January – pound up by 4% over course of one week
December – Conservatives win General Election – pound leaps from €1.17 to €1.20 (but not for long)
2020 to 2021, Recovery (stalled)
In February 2020, the pound exceeds €1.20 due to a mixture of poor data from the eurozone with disappointing growth and forecasts, plus Rishi Sunak taking over as Chancellor. He was seen by the marketd as a potentially high-spending chancellor, in the pocket of Boris Johnson and Dominic Cummings.
However, just a month later the pound was at €1.06 and $1.15 as Covid-19 lockdowns shut down much of the global economy.
The pandemic continued to have a significant impact on the currency markets, but for sterling the worst was already over. Despite some hiccups GBP/EUR went from lows around €1.10 in September 2020 to €1.21 in February 2022 during almost 17 months of near-continuous growth. Against the dollar, it moved between $1.32 and $1.41. The reason was the success of the vaccine programme in the UK in early 2021 compared to slower moving EU countries.
The GBP/EUR exchange rate fluctuated by 8% last year. So, if a business had to buy £1m worth of euros, the difference between the highest and lowest exchange rate would be €90k.
In short, the pound has fluctuated wildly since 2016 due to Brexit, the pandemic and now the war in Ukraine.
A ‘black swan’ is an event that was not foreseen by anyone, not even the major banks, but in retrospect could be seen to have a certain logic. The past six years has seen a bevy of black swans in politics, the economy and, of course, health. While Brexit was foreseeable, though unexpected, the election of Jeremy Corbyn as Labour Party leader and Donald Trump as US president, the pandemic and a full-scale war breaking out in Europe were more unexpected.
These have all, one way or another, impacted the currency markets severely.
So, while sterling launched into 2022 at its highest point since the referendum in mid-2016, the past six years offer a salutary warning. Anyone making a significant transaction this year should bank on the unpredictability of major exchange rate movements and the need to protect your business and plans. Another black swan may be round the next bend of the river.