Brexit uncertainty has been hitting the UK economy throughout the years following the 2016 referendum, with traders ultimately reflecting that in economic decline through a weaker pound. The pound is typically the foremost barometer of sentiment around an economy, with a direct correlation between weaker growth and a weaker pound. Sentiment and monetary policy also play a part, yet all are intrinsically linked in providing markets with an overarching view of where the pound should be. However, with the UK in the grips of a temporary period of uncertainty, Brexit represents an opportunity given the propensity of major market moves in the aftermath of its conclusion.
How does the 2016 referendum guide us?
The referendum result highlights the potential reaction once we get greater clarity on the form of Brexit (if any) the UK will take. On the daily chart, we can see a sharp appreciation in the price of EUR/GBP in the aftermath of the referendum result, with the continuation of that rally playing out through much of the months that followed. This highlights the relationship between perceived economic weakness and the trajectory of the pound (note that GBP decline continued for months until data emerged to lessen fears). With that in mind, the ultimate Brexit outcome will be directly reflected in the value of the pound.