• Subject Name : Accounting and Finance

The Potential Impact on Financial Markets, Especially FX Markets, of The United Kingdom's Exit from the EU

The United Kingdom’s exit from the European Union was expected to have several economic and financial backlashes. The Brexit was finalised on 1st February 2020 with the first referendum coming out on 23 June 2016. Taylor (2009) stated that political instability results in reactions in the financial markets. With so many uncertainties surrounding the decision of Brexit, even the politicians were not sure of its affects (Fakhry, 2019). The initial Brexit vote saw an immediate effect in the Foreign Exchange market with the value of pound depreciating to a 31 year old against US Dollar with a loss of over two trillion dollars in the global stock markets (Hobolt, 2016). The US equity market also suffered the consequences of Brexit, with Dow Jones plunging 3.5%, NASDAQ by 4% and S&P 500 by 3.5%. In Europe, the Euro Stoxx 600 declined by 6% and Germany Da by 7% (Toma, 2018). According to the analysis by Fakhry (2019), a high volatility and uncertainty in the financial markets would persist with a weak economic sign during the process of Brexit with the market participants being highly reactive to unexpected events. Whereas Korus and Celebi (2019) show that there existed a delay in rection by the market participants to the bad Brexit news as opposed to the good news relating to Brexit.

Most of the Brexit volatility was reflected by the British pound vs Euro exchange rate as the results of the referendum came in (Korus and Celebi, 2019). This is also supported by (Breinlich et. al., 2018) with reasons corresponding to the expectations of the investors for an economic slowdown. The UK documented short run as well as long run impacts of Brexit with lower GDP growth and higher inflation. The dependence of UK firms on the financial markets was evident from the stock price changes witnessed on the 24th of June 2016, the day after the referendum (Breinlich et. al., 2018). UK and Europe are highly inter-connected in terms of the financial activities. Brexit would create a difficulty for the financial services in the UK to use the equivalence arrangements with EU for a Single Market access with a third country status (Ringe W., 2018).

In conclusion, it can be said that the financial markets have been affected with a lot of loss bearing and more is expected by the analysts. The impact was so strong that not only the UK and Europe markets but also the markets like the US were greatly affected. The decision to exit the European Union by the UK is expected to have both short term and long-term effects with impacts on GDP as well. The value of British pound also depreciated largely against US dollars and large fluctuations were also witnessed against the Euro.

References for The Economic Effects of Brexit

Breinlich, H. et. al. (2018). The economic effects of Brexit: Evidence from the stock market. Fiscal Studies, 39(4), 581-623. DOI: 10.1111/1475-5890.12175

Caporale GM, Gil-Alana L, Trani T (2018) Brexit and uncertainty in financial markets. DIW Discussion Papers 1719.

Fakhry, B. (2019). Did Brexit change the behaviour of the UK's financial markets? Journal of Economics and Political Economy, 6(2), 98-121. Retrieved from https://www.zbw.eu/econis-archiv/bitstream/11159/4192/1/1690928379.pdf

Hobolt, S.B. (2016). The Brexit vote: a divided nation, a divided continent. Journal of European Public Policy, 23(9), 1259-1277. DOI: 10.1080/13501763.2016.1225785

Korus, A., & Celebi, K. (2019). The impact of Brexit news on British pound exchange rates. International Economics and Economic Policy, 16(1), 161-192. https://doi.org/10.1007/s10368-018-00423-0

Oxford Legal Research Paper Series No. 10/2017.

Ringe W-G (2018). The irrelevance of Brexit for the European financial market. University of

Taylor, J.B. (2009). The financial crisis and the policy responses: An empirical analysis of what went wrong. NBER Working Paper, No.14631. DOI: 10.3386/w14631

Toma, F. I. (2018). The Impact of 'Brexit' on the Global Financial Markets. http://dx.doi.org/10.2139/ssrn.3270606

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