It's time. Almost a year after a (slim) majority of Britons voted in favor of their country's withdrawal from the European Union in a referendum, talks about that separation started on Monday 19 June.
The intention is that these discussions will lead to the United Kingdom and the European Union (EU) actually parting ways in June 2019. It currently looks very likely that this separation will be a so-called “hard Brexit” will be. Brussels does not grant London anything at all in the divorce proceedings.
In the EU, they are terrified that if the British get their way, this could encourage other countries to also leave the European Union. After all, the prospect of creating a kind of à la carte menu (keeping what is beneficial and dropping what costs money) would also be attractive to some other countries.
Free trade
That is why Brussels is taking a fairly tough stance in the Brexit negotiations. For example, Brussels only wants to talk about a free trade agreement after Brexit and not before. The reason for that? Free trade with the EU means unfettered access to the largest and richest market in the world. That's the jackpot for every country. And that is precisely why Brussels does not intend to simply hand over that jackpot to the British, even on attractive terms.
We will only know as the discussions progress what the consequences of this separation will be in the long term, including for mutual trade. In another market, continuous consequences can be expected. Currency rates tend to react to anything new. This could be unusually bad weather, but also (as in this case) political unrest.
After the referendum result, the EUR/GBP rate rose from 0,80 to almost 0,90, before continuing to fluctuate at 0,85. That is a noticeably higher rate than has been usual in recent years. Since mid-2012, the EUR/GBP rate has been between 0,70 and 0,85 with a clear downward trend.
Hedging currency risk is more expensive
It is expected that the volatility of the price may increase in the coming months and quarters. If there is news that the Brexit talks are going unexpectedly smoothly or even more difficult, there is a good chance that this will almost immediately have an impact on the value of the British pound (relative to the euro).
This volatility of the price, the extent to which the price rises and falls, has a major influence on the price of currency options and futures. This makes them more expensive, because the other party knows that the chance that the price will move unfavorably has increased. This means that it would not be surprising if hedging sterling risk became more expensive now that Brexit negotiations have begun.
It could also mean that simply buying or selling the pounds could cost more, or yield fewer euros. This can happen when the difference between the buying and selling prices increases. That would not be surprising if mobility indeed increases. That's something companies trading with the UK should keep in mind.
Additional upward pressure for EUR/GBP
Finally, it is also easy to imagine that, during the Brexit negotiations and thanks to those talks, another factor may also have a greater influence on the price of EUR/GBP. If the British central bank continues to maintain very loose monetary policy at home, while the European Central Bank (ECB) is preparing to make this less lenient, this could put additional upward pressure on the EUR/GBP.
For the time being, a less loose monetary policy by the CB is certainly not on the agenda. However, remember that Brexit negotiations could take 2 years. At that time it is to be expected that the ECB will adjust the monetary policy loosen the reins. This can be done, for example, in the course of 2018 and 2019.