Since January 1, 2021, the Brexit deal did not significantly affect the British pound’s exchange rate. The pound was still steady against the other currencies, such as the US dollar, which at the time was at US$1.36 and has strengthened a bit against the euro to €1.12.
These figures are consistent with the expectations of the global market. Now the question is, what will happen in the future?
Brexit’s Effect on the British Pound
According to the research center Changing Europe, the effect of Brexit on the UK economy is predicted to show slowly, but it will be permanent. The research center estimates that the UK’s economy will decrease by 4.9% in the next 15 years.
This number could put more pressure on the British Pound, which has been weak in the past few years. The question now is how fast the effects of Brexit are likely to feed through.
Also, Brexit has played a role in undermining international investors’ belief in the United Kingdom as a leader of stability and trustworthiness and a bright future for the British economy. This will also affect the British pound in the future.
Pound Sterling was already in a downward trend against the euro and the US dollar over the past few years. Since the global financial crisis that happened from 2008 to 2009, this trend has accelerated because of the UK economy’s prolonged productivity growth.
This is even though the country was running a loose monetary policy and was never to pick up from the slump. Now the pound has been falling faster against the US dollar and the euro.
This is where the Brexit deal comes in.
The Brexit trade deal guarantees that goods and machines will continue to trade without any tariffs. There are still caveats that are likely to undermine the trade between the UK and the EU with consequences for the British pound and the euro.
To qualify for zero tariffs, the goods also need to satisfy all of the original rules, connecting to where the goods and machines came from. So if a car is assembled in the UK, it will qualify to be sold without tariffs to the EU as long as 60% or more of the car’s value was produced either in the EU or the UK.
Also, trade in goods covered by the deal is only free of tariffs as long as there is no divergence in the rules and regulations. This means that neither side is allowed to lower their standards if they are aiming for free trade.
If the deal leads to divergence in UK standards in the future, this could decrease the number of products that could be traded. But the UK may avoid diverging from the EU’s standards, and because of this, more tariffs will not be added.
Overall, trade models predict that the international trade in goods between the EU and the UK will decrease, especially now that Brexit had created challenges for the two.