Nobody really expected the British public to ‘vote leave’ in the EU referendum. For weeks, the media had everybody convinced that the UK public was, on balance, more convinced by the Remain campaign’s arguments than anything peddled by the vote leave campaign. As a result, the pound rallied strongly in the days leading up to the referendum. Big business was confident the British public would “see sense” and vote to stay.

 

Creative commons photo by UK Home Office

Sterling Drops Following EU Referendum

Once again, however, the pollsters got it badly wrong. When the results came in and it became clear the country wanted to leave the EU, the pound slumped to a 31-year low. It was the biggest loss over the course of one day the markets had seen. By the close of business, the pound was down 10% against the dollar and 7% against the Euro.

Since then, the value of sterling has remained low amidst fears that the UK would have to navigate a ‘hard Brexit’. Theresa May’s speech at the Tory Conference in October 2016 ended weeks of speculation about the process of Brexit, but the pound dropped once again in response to the news that formal talks would take place in the first quarter of 2017.

Markets Rally in Wake of Brexit Speech

By contrast, the effect of Teresa May's most recent Brexit speech on the pound has been astounding. Details surrounding Brexit have been vague since Britain voted to leave. The lack of clarity has had an unwelcome effect on the pound, but May’s speech at Lancaster House on 17 January sent the value of the pound soaring by 3%. By the close of trading, the pound was trading at $1.2384 and €1.1445.

The markets were clearly buoyed by Theresa May’s optimistic talk of remaining friends with the EU whilst building relationships with trading partners outside of the EU. The only stutter came when May confirmed that Britain would not remain a member of the single market. However, she did confirm that parliament would be given a vote on the final Brexit deal.

Why Did the Pound Rally?

One of the main reasons why the pound has performed so badly in the wake of the EU referendum is that political uncertainty breeds financial strife. Theresa May managed to deliver a powerful speech that was reassuring as well as unyielding. The markets have been fearful of a toxic divorce from the EU, but May has promised the changes will be staggered, thus calming fears and boosting the pound. However, most experts at ETX Capital fear that this rise is only temporary and there is plenty of volatility ahead.

Whether this is true remains to be seen.