International CurrencyInternational Currency

Protect yourself against currency volatility in the lead up to the EU Referendum

Whether you’ve seen it on the news, read it in the newspapers or witnessed its dramatic effects on our live Currency Converter page, the EU referendum is beginning to take center stage. As we get closer to June 23, 2016 , many are worried about the volatility of Great British pound, wondering ‘how will it affect me?’, and ‘what can I do about it?’

As we tackle Brexit and its effects on British expats in the U.S., we will also share some of the methods that our customers have adopted to stay one step ahead during these unpredictable times.

What is Brexit?

In 1993, the European Union was created out of the ‘European Economic Community’; a collection of European countries that banded together to prevent a repeat of the Second World War. The UK had joined the EEC in 1973, 20 years before the formation of the EU, and there were great benefits for the countries involved. Economic trade boomed, international research and education flourished, and visa-free travel gave increased freedom for citizens from any of the 28 member states.

Many claim, however, that the strict membership rules and growing number of EU policies, which invariably trump all domestic policies, make it difficult for some nations to act independently and retain their national sovereignty. One of those nations is Great Britain.

On February 20, 2016, David Cameron, the British Prime Minister, announced a referendum would take place on June 23, 2016, to vote on whether Great Britain, a key player and important part of the union, would exit. Brexit was born (short for “British Exit”).

The Prime Minister is now opposed to a British departure from the EU, while the Mayor of London, Boris Johnson, is openly for it. Each of them has received considerable support (and criticism) from the press and the public, respectively. There has also been talk of Brexit starting a domino effect, including a Czechzit (Czech Republic-exit) and another Scottish bid for independence from Great Britain.

With so much foreign trade, investment and mobility depending on the UK’s involvement in the European Union, the pound has become highly erratic due to the sheer uncertainty of the outcome. Although nobody knows what the result of the referendum will be, many believe that the pound will only become more volatile as we get closer to June 23rd.

What does this mean for the British pound vs US dollar?

During the financial crash of 2008, the pound and the dollar suffered a devastating depreciation in value on the currency market. Since then both currencies have shown significant signs of recovery. However, 6 years later in July 2014, GBP began a steady decline against USD; a trend that continues to this day.

“On February 26, 2016 USD recorded its strongest level in six years against the Great British Pound,” says Darren Richardson, Dealing Desk Manager for North America, USForex. “Looking forward, we are factoring in greater volatility over the coming months with potential for more USD gains as Brexit fears escalate.

The U.S. and UK have a historic relationship that stretches back for centuries. When President Obama made plans to visit the UK in March to support the ‘stay’ vote, some speculated an attempt to keep open America’s doorway into Europe. And the president’s move hasn’t come without opposition. Boris Johnson, The Mayor of London, who is actively pro-Brexit, has hit back at the president from across the pond, disturbing a long-standing and fragile understanding between the two nations.

These events haven’t gone unnoticed by individuals and businesses heavily invested in the pound. There are passionate parties on both sides of the fence, forcing sterling to climb and fall against the dollar repeatedly in the weeks since the announcement. Many are concerned that the pound will react further if the UK votes to leave the EU, and even more foresee heightened volatility as Britain comes closer to deciding on its future in Europe.

How will this impact businesses and British expats living in America?

The weakening pound, which has dropped from 1.52 against the dollar to lows of 1.38 in under six months, could have a critical impact on Britons living in the States. Any funds received from the UK from friends or family could carry substantial losses due to exchange rate fluctuations. If you’re retiring in America, your State Pension may be re-routed to your US bank, but any regular support being sent from back home may need to be increased to meet your needs.

U.S. businesses importing goods and intellectual property from the UK are likely to find that the strength of the dollar is bringing their costs down. Compared with the last two years, you may be able to purchase more inventory or the same amount for less. You may also find it has offset the gradual rise of inflation for UK produce. Being such a fruitful time for those trading with the UK, you may want to utilize a financial product that helps you get the most from this moment.

On June 23, 2016, UK citizens will cast their vote, and should the UK remain in the EU many believe we will see the pound recover and push the dollar back away from parity.

What can I do about Brexit?

IMPORTANT: The contents of this blog do not constitute financial advice and are provided for general information purposes only without taking into account the investment objectives, financial situation and particular needs of any particular person. UKForex Limited (trading as “OFX”) and its affiliates make no recommendation as to the merits of any financial strategy or product referred to in the blog. OFX makes no warranty, express or implied, concerning the suitability, completeness, quality or exactness of the information and models provided in this blog.

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