The UK’s general election on 8th June resulted in a surprise hung parliament. In this blog post, we explore the implications of this for the UK government and the Brexit negotiations.
In April we noted the uncertainty that a Brexit vote would bring to the British economy.
In this post, we examine how the economic risk the UK now faces may be manifested in a post-Brexit UK. In particular, we look at a “worst case scenario”, and what this might mean for the economy, and the currency.
Sterling’s deprecation since June this year has been dramatic and many commentators have welcomed this as a way to rebalance the economy via an improving trade balance. However, this may not be the first and foremost mechanism presently at work : instead, we argue that the income balance is perhaps more important and the key adjustment mechanism in a world where trade responsiveness to currency changes is less than in the past.
The uncertainty associated with the outcome of the referendum on Britain’s EU membership is already affecting financial markets and the wider economy. By examining the pricing of derivatives, we can identify the price the market is putting on this uncertainty, and what movements in currency are expected between now and the referendum itself.