The specter of Brexit looms heavy on the British Pound. Many economists see the pound falling post-Brexit, but they are debating just how much it will fall and how quickly it will recover. The biggest variable in their analysis is just what form the Brexit will take. The more negotiated the exit is, the gentler the impact should be. There are four major directions that the Brexit could take and how quickly the British Pound will rebound is dependent on the direction taken.
1. Hard Brexit
A hard Brexit is one in which Britain exits from the European Union without any agreements in place. Without any trade or immigration agreements in place, the system could see a hard shock. This hard shock will affect business through Britain and the EU. Companies and individuals will be caught unaware and this general sense of anxiety will weigh very heavily on business sentiment.
If a hard Brexit occurs, the British Pound may become very weak. It may even reach parity, or even lower, with the Euro. As businesses need to transfer their money out of the pound and into the Euro, the pound may find itself skirting records lows. It could even hit parity with the US dollar. This kind of weakness would normally make British products cheaper in Europe, but trade barriers from a hard Brexit would wash out any real gains. Any rebound in the pound would certainly take years.
2. Soft Brexit
British politicians, by and large, want a soft Brexit. A soft Brexit would be a negotiated agreement with a series of steps to de-integrate the UK and the EU. There would be agreements in place for trade as well as immigration. These agreements would govern trade going forward between the EU and Britain. Some companies and industries would be more affected than others, but most business would continue unimpeded.
If a soft Brexit occurs, the pound will probably see a short-term loss before rebounding slowly. A drop in the pound over the short term would make British products cheaper on the continent. Trade agreements would ensure that British companies still had access to EU markets.
3. Mixed Brexit
A mixed Brexit brings a mixed response to the markets. If politicians are able to negotiate some agreements concerning the Brexit along with some beneficial agreements going forward, the prognosis for the pound could be ok. On the other hand, if certain industries are shut out then the Brexit could feature serious future problems. Some businesses might even start looking for places to start a business outside of the UK. A mixed Brexit would cause considerable economic uncertainty in how the British Pound would react. Likewise, it’s difficult to predict how quickly it would rebound from record lows.
4. Fake Brexit
A fake Brexit is increasingly unlikely to occur because of the massive political fallout that would result from British politicians ignoring the will of the people. Nevertheless, it could occur. A fake Brexit would be a Brexit on paper, but agreements would be made that would essentially continue the status quo under a new name. Trade and immigration would largely remain the same. In a fake Brexit, the pound would begin rebounding almost immediately. It would recover most, if not all, of its post-Brexit vote losses.
While not mentioned, Britain could always decide to stay in EU. This is extremely unlikely, but as these different options show, there really is no easy way forward. While the British Pound will rebound after Brexit, just how quickly it rebounds is anybody’s guess.