A sterling roller coaster

A very good indication of the market’s reaction to Brexit is the movement in the pound.

If we consider the various votes held in Parliament in recent weeks together with other Brexit related news a clear pattern emerges. Whenever there is an indication that the UK is moving away from a ‘no deal’ exit there is a noticeable strengthening in the pound (chart above by XE.com)

In early January 2019, when an ‘no deal’ Brexit seemed to be more possible than it is today, the pound fell to its lowest point in recent months trading at just over 1.10 against the euro. As the appetite for a ‘no deal’ Brexit seemed to wane, the pound regained strength and by the end of January it reached 1.1563 against the euro.

Earlier this week, as it became evident that the UK would crash out of the EU without a deal unless the EU granted an extension to Article 50, the pound fell below 1.15 against the euro (from recent highs of 1.1774). After an agreement was reached with the EU late last night, the pound bounced back  to 1.1692 (+1.39%) against the euro (chart below by the BBC).

Investors have picked up on these patterns and are buying the pound on weakness. Over the past year the pound also weakened against the dollar and as a result we are seeing renewed interest from US investors in the London property market.

In the event of a soft or orderly Brexit, the market expects the pound the strengthen further against the euro and dollar, whilst a no-deal exit will in all probability see the pound weaken substantially against major currencies.