The Euro and the Brexit

When it comes to the effects of Brexit on the forex markets, it is normal to immediately think of the effects on sterling. The pound has lost -14.0% against the Euro since June 2016, when the fateful referendum which established the will of the British people to leave the European Union was held. The fall in the pound has reduced the purchasing power of households and businesses but gave a boost to the competitiveness of British exports.

Trade relations between the United Kingdom and the 27 member states of the European Union are of fundamental importance for both parties. Suffice it to say that British exports of goods to the European Union alone account for about 48.0% of the total, while 16.0% of the continental block export, excluding intra-EU trade, is destined for the United Kingdom. In light of these data, the trade barriers that will be created by Brexit will have a negative impact on trade. The effects on the EURGBP and on the growth of British and European GDP are already negatively affecting trade.

Ireland, the Netherlands and Belgium are the most exposed economies in terms of dependence on exports to the United Kingdom, while Germany and France are the largest exporters in terms of volume. Looking at the different sectors, the transport industry is the most vulnerable for the EU, as exports to the United Kingdom represent 11.3% of the value added in the sector. Food products are the second most exposed sector, followed by textiles.

The real impact on trade will probably begin to be evident in the medium/long term as a result of the actual change in relations and the need to adapt supply chains. However, it is already possible to see some signs in terms of bilateral trade flows, in line with exchange rate developments.

The question is the following: what will be the consequences of Brexit and the reduction of trade on the euro? So far, traders have focused almost exclusively on sterling trading, making it extremely news-sensitive compared to what they have done with the euro. And this is reasonable, considering that for most economists London has only to be worsed off by the Brexit.

But if London loses does Brussels win? No, if we observe data. The reduction of exports to the United Kingdom is one of the certain effects of Brexit. Therefore, from the forex market point of view, Brexit is a classic lose-lose situation between the two parties. The winner should be the dollar once again. Which should be affected by the fall in exports, but to a lesser extent than in European countries. Since the value of one currency against another is strictly dependent on the commercial strength of the issuing country, here is why Brexit should weaken the euro more than the dollar, because the commercial side effects of Brexit will impact more on Europe that on the United States, ceteris paribus.

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