With Britain set to leave the European Union on 29 March, with or without a deal, only one thing is clear: there is much uncertainty surrounding financial markets.
Prime Minister Theresa May has had constant struggles with her own government, party and the population of the UK. Mrs May managed to get her cabinet’s backing of her Chequers plan in July 2018, but not without friction, with resignations from then Brexit secretary David Davis and outspoken eurosceptic Boris Johnson resigning from the foreign secretary post.
The EU rejected the Chequers plan in September 2018. Mrs May finally agreed a deal with the EU in late November 2018, but was forced to postpone its voting in parliament due to concerns that it would fail to pass, which triggered a Tory vote of no confidence against the prime minister that Mrs May survived.
The new proposed vote is scheduled for 15 January 2019. With vast uncertainty surrounding whether an agreement can be passed before the UK is set to leave the EU, the possibility of a no-deal and the future arrangement of UK-EU relations, it is hardly a surprise that the markets have been volatile. The Brexit impact on financial markets can be seen through two of the UK’s most popular markets: the GBP/USD currency pair and the FTSE 100 index.
Brexit impact on markets: GBP/USD
From April to August 2018, the GBP/USD witnessed an overall downtrend – dropping from highs of 1.43 to lows of 1.27 – partly due to the prolonged uncertainty of the Brexit negotiation process and government resignations in the wake of the Chequers plan.
Two days later, when May announced that she would fight the no confidence vote lobbied against her by Tory MPs, the pound rallied to 1.26. Recently, the pound has been trading broadly sideways but remains susceptible to Brexit swings.
Brexit stock market impact: FTSE 100
Any strength in the sterling – however short lived – is a drag on the FTSE 100 since a large proportion of profits for FTSE 100 companies is made in dollars. It’s simple: a stronger pound eats into dollar profits.
From the August to December period, the FTSE 100 dropped from 7,761 to 6,719, but it’s looking as if it might have bottomed out after hitting a two-year low in December – depending on whether May can pass her divorce bill on the 15 January.
More recently, following government confirmation that the parliamentary vote will be held on 15 January and sources denied the possibility of the vote being further postponed, the FTSE 100 has picked up – trading at 6,858.07 on 8 January 2019.
It is likely that Brexit stock market impact will be less apparent with the FTSE 100 in comparison to the FTSE 250. This is because FTSE 250 firms receive a greater share of their revenues from the UK and hence the index is more reflective of UK economic conditions.
It is worth noting that US-China trade talks have also injected volatility into both the GBP/USD and FTSE 100, and as such, the latest updates in this development can also propel or dampen these markets. The future impact of Brexit on these markets, and the general Brexit economic impact, is contingent on whether Mrs May can pass her deal through parliament, and if not, what the governments sets out to do before 29 March. Until then, it is difficult to say what the UK stock market after Brexit will look like.