In addition to a sharp drop in value of the pound, the volatility of the exchange rates between the pound and other major currencies has reached unprecedented levels. These contrasting scenarios explain the mixed reaction in the UK stock market, which was still negative for the average company in the FTSE index. Domestic producers that use a lot of imported components will see their costs increase and their profits evaporate. On the one hand, major British exporters such as BP, BAT and Rio Tinto, will benefit from the declining pound because their domestic costs will now be lower at the same time, the value of their exports will proportionally increase. (Two days after the vote, the pound dropped to its lowest value in more than 30 years.) Lower value of British currency has an uneven impact on the value of businesses inside the country. And because global business is so interconnected, the prospect of a worldwide economic slowdown becomes more plausible.īecause of this unexpected slowdown in economic activity, the first obvious casualty of the Brexit vote was the British pound, which significantly depreciated against other major currencies. Many large businesses, unsure of future access to the common European market for goods and services, will most likely postpone or even freeze their major investments in the U.K.
#BRITISH EXIT EU AFFECTUS MARKETS DRIVER#
The increase in uncertainty about economic growth in the United Kingdom is the major driver behind the immediate reaction in the financial markets. Brexit will inevitably increase the friction between the UK and its international trading partners.
To understand where the markets might head now, we need to look at the underlying economic impact of the decision to leave the EU, and how it will affect the U.K. British citizens voted June 24 to leave the European Union - a surprise that reverberated through the financial markets.
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