- Brexit has screwed the GBP while boosting the EUR
One of the clearest ways to see this is by directly comparing the performance of the GBP against the EUR in the Foreign Exchange markets.
Below are charts of the GBP/EUR exchange rate and, from the alternative perspective, of the EUR/GBP exchange rate from 1st January 2016 to date.
Both are shown in nominal and percentage terms to make comparisons easier.
1. The GBP against the EUR
- GBP/EUR - Nominal
- GBP/EUR - Percentage
2. The EUR against the GBP
- EUR/GBP - Nominal
- EUR/GBP - Percentage
The charts above show that as more and more time passed the insanity of Brexit became clearer and clearer, the GBP just kept on sinking lower and lower against the EUR while the EUR kept on rising higher and higher against the GBP.
One of the useful aspects in the mathematics of foreign exchange, and a reason why it is one of the better indicators of relative economic health, is that it incorporates a comprehensive spread of economic parameters (something that those who monitor intraday movements are well aware of).
While the Foreign Exchange markets are not perfect, they are actually pretty good, particularly when viewed over the medium to long term when the impact of short term noise can be minimised.
On the downside, some aspects of the Foreign Exchange markets and the movements that are generated by them are a bit like the Wild West, however their impact is generally short lived as the noises they generate tend to cancel themselves out within a few days.
The elements that I am most wary of are those of market sentiment and momentum both of which are difficult to quantify, however the practicalities, mathematics and the real time operations of foreign exchange markets mean that, in my experience, they rarely last for more than a few weeks – a relatively recent example is what happened to the USD after the 8th November 2016, it took less than two months for the market sentiment and momentum (irrational exuberance) created by the election to be overtaken by reality of the Frankenstein's monster it had created!
When all aspects are considered and Foreign Exchange movements are viewed over the medium to longer term and/or as averages (minimising short term noise), the Foreign Exchange markets do have a history of being one of the better indicators of the relative economic health and prospects between two countries (or, as in the case above between a country and a currency region).
• 1st January 2016 is used as the start date in the charts as, while the prospects of the economic impact of Brexit started to affect the GBP in November 2015, it was relatively close and makes it easier for independent verification of the charts.
• Using 1st January 2016 should also avoid any accusation of overhyping due to it understating the impact of Brexit on the GBP (and the EUR).
• Care should be used in the interpretation of the 3 month average lines as, by virtue of them being 3 month averages, they lag the actual rate.
• While 3 month averages have some drawbacks I have found that, when taken in their correct context, they improve the rapidity of assimilation as they provide a perspective that has removed (most of) the distractions of short term noise.