Before Brexit referendum, the sterling was considered doubtlessly, like the US dollar, a world safe asset and a reserve currency, meaning that it was largely held by central banks and other financial institutions to prepare for investments, transactions and international debt obligations, or for intervention on forex markets. A strong and trustwhorty currency, to be bought in adverse market phases. Everything changed after the 2016 referendum, when the victory of ‘Leave’ sent the pound to a multi-year low against the dollar and increased its volatility. From that moment on, the British currency has lost its reputation of a safe asset, and, according to many analysts, its ups and downs remind the behavior of emerging currencies. The pound has lost -20.0 per cent of its value since the United Kingdom voted to leave the European Union. During the “flash crash” (October 2016), when it suddenly plunged to 1.15 against the dollar and over the last hours, the pound hit the lowest level since 1985 and a good percentage of forex traders believe that it can reach the parity against the euro, or it may go even lower, in case of no deal Brexit on October 31. The risk of ever-rising volatility surrounding the pound, which is a phenomenon which usually hits only emerging currencies, is so high that the British Financial Conduct Authority has been obliged to warn that trading it using information taken from unpublished polls could breach market abuse rules. The Sterling is experimenting very high levels of volatility, ahead of manoeuvres in the Parliament that could see a ‘no deal’ Brexit outlawed by MPs. Political uncertainty is infusing further volatility in the market and that one of the pound is becoming increasingly similar to that one of an emerging currency, so much so that the definition of a “quasi” emerging currency now seems the most appropriate one for the British currency.
Sterling: from reserve to quasi-emerging currency?
