Recent articles on the history and impact of global events on the sterling market have provided insight into how this currency is affected. It also touched on the significance of sterling in the history of EM currencies, its current volatility, and Brexit. Listed below are the main lessons learned. If you’d like to learn more about the sterling market, read on! Here’s a summary of the lessons learned and the history of sterling. Also, find out more about Brexit, what it means for the sterling market, and what it means for you.
Table of Contents
Lessons from EM currencies
A number of EMEs have adopted macro-prudential policies in recent years, particularly in the face of external financial shocks. These tools are particularly useful in maintaining low levels and accumulating policy spaces during economic downturns. These policies have also helped EMEs achieve price stability. Such policies are best suited to fix currency mismatch and maturities problems. However, they pose a number of challenges.
Some emerging market economies, for example, have become more selective in their capital flows, which has reduced the risk of capital outflows. For these reasons, they have accumulated large foreign assets in the form of foreign exchange reserves. They have also strengthened their governance frameworks. Thus, these EMs are better positioned to weather future financial shocks. And these policies have improved their balance sheets and allowed them to attract more foreign investment. These countries have not seen a halt in their economic growth.
Historical significance
During the 1950s, the pound sterling fell as the British Empire declined. In the wake of this decline, British political sentiment began to shift towards European trading and away from preferential trade with the Commonwealth countries. In 1957, Britain tried to join the European Communities. Eventually, the sterling value fell, and the United Kingdom maintained monetary restrictions on all long-term foreign investment, even within the overseas sterling area. The restrictions were increased by repeated financial crises in the 1960s. However, the pound sterling still enjoys a preferential exchange rate.
The Commonwealth countries were the sterling area in the 1970s. The exceptions were Canada, Australia, and New Zealand. In 1973, the United Kingdom became a member of the European Economic Community (EEC). This resulted in the gradual elimination of exchange guarantees and floating rates across trading nations. The last sterling exchange controls were removed in 1980. The pound sterling is no longer the UK’s representative in world trade.
In 1967, the pound sterling was devalued. This led to huge capital losses in members overseas. As a result, the British government negotiated Basel Agreements with other governments in the Sterling Area to limit the amount of non-sterling assets held by their citizens. This helped to stop the decline in sterling reserves. It was partially underwritten by other central bankers concerned about international monetary stability. The Bank for International Settlements assisted with these agreements.
One group of countries once held the majority of their foreign exchange reserves with Bank of England. This was called the sterling area. This gave these countries access to London’s money and capital markets. Their currencies were maintained in parity with sterling. Many countries had to abandon the gold standard after the 1931 devaluation. These countries kept their London reserves, which led to the creation of the Sterling Bloc (or Sterling Area).
The sterling area was a zone of relative exchange rate stability during the Second World War. While there was no single central bank, the currencies of the countries in this area were fixed relative to the British pound. When the New Zealand pound underwent a devaluation, it was revalued in 1967. Members of the Sterling Area enjoyed a relatively low exchange rate and easy access the British capital markets. The devaluation of the pound in 1967 led to the formation of the Eurozone.
Impact of Brexit on the market
The value of the UK pound sterling declined dramatically in the two weeks after the referendum, falling nearly 12%. Since then, the pound has remained weak, leading to a debate about the competitiveness and sustainability of British businesses. However, UK export volumes have not responded to this depreciation, despite the weakened sterling. However, Brexit’s implications are not fatal. We will be discussing some of the implications of Brexit on the sterling market in this article.
Despite negative sentiment surrounding it, it has been steadily falling in value against major currencies, particularly the euro. The currency’s fall is expected to add about one percentage point to inflation, which might cause the Bank of England to consider raising interest rates if the pound is falling in value. A UK newspaper claimed earlier this year that the pound could increase by as much as 10% if there is no deal. This prediction is now unlikely and a no-deal Brexit could cause the pound’s fall by around 10%.
The pound’s decline is likely to be temporary rather than permanent. Before the vote, the currency plunged sharply. The change in the UK-EU trade relationship did not cause sharp falls in sterling’s value. These movements are not the main source of global foreign exchange transactions and may not have caused the rapid decline in the value of sterling. Sterling’s value could have fallen due to a variety reasons, including uncertainty about the future relationship between the UK and EU.
The news of the EU triggering Article 16 of the UK’s withdrawal process has shocked the market. Sterling plunged sharply against the dollar and the euro, creating uncertainty in the currency. Banks were considering moving their operations to other European countries. The stability of the EU is also at risk due to the rise of right-wing parties. This uncertainty is only likely to worsen the situation in the coming months. The market must be alert and ready to react to Brexit’s consequences.
Market volatility at the moment
Recent events have caused the volatility of the sterling market to spike. As trade talks between the UK and the EU remain on a knife-edge, the implied volatility of sterling has increased by nearly a third. Traders are being cautious as headlines are incredibly sensitive. Sterling could move higher if there is a decent move in the next few hours. A decline could also occur. Investors should be alert if this happens.
This rise and fall could be explained by the fact that sterling has been in a prolonged period with political uncertainty. A sharp fall in sterling’s value is a result of growing negative expectations about a ‘hard Brexit’. This is a sign that investors are taking profits from their long positions. An increase in sterling’s value would indicate better prospects for a trade agreement and a more orderly Brexit. Recent research has shown a strong correlation between uncertainty about the outcome and expectations regarding exchange rates. Market participants use economic policy uncertainty to form their expectations.
Recent events have also increased the volatility of the sterling exchange rate. The pound has depreciated by 3% in the past five years, mainly due to uncertainty surrounding Brexit. In addition to increasing political instability, increased trade frictions have caused financial institutions to sell sterling-denominated assets, pushing down its value. The laws of supply-and-demand also affect currency exchange rates. If a particular currency experiences a negative effect on its value, the market will react quickly and sell it.
The fall in the pound’s value illustrates how rapidly market expectations can change. Many commentators were surprised by the result of the Brexit vote, despite having predicted a victory for Remain. In the days leading up to the referendum, sterling had seen a rise in value. This shows that the currency isn’t as strong as people thought. In the UK, sterling is worth less than half its value in the US. The pound is still relatively weaker than the other major currencies.