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No Lehman moment on currency markets after Brexit vote

While the pound sterling has lost a lot of its value right after the Brexit vote, from a historical perspective neither the fall of the exchange rate,

Publishing date
30 June 2016
Zsolt Darvas

The exchange rate of the pound sterling plummeted after the unexpected Brexit referendum result. Between the 23rd and 27th of June, it fell by 11% against the dollar and 8% against the euro (it has regained a bit in the past two days). While such drops are large, these magnitudes should be assessed from a historical perspective, given that there was considerable volatility in the period before the referendum, and that the British currency gained a lot in value from 2012-15.

Exchange rates against the dollar and the euro are important, yet what matters more is the weighted average exchange rate against trading partners, for which the weights are derived from the importance of trade relations. For a better analysis of short-term currency movements, we have created a daily nominal effective exchange rate series against 138 trading partners (Figure 1).

The exchange rate of the pound sterling against the dollar fell to its lowest value since 1985 after the referendum.  Against the euro, the pound sterling fell to a value observed in 2013.  Against 138 trading partners, it fell to where it was on average in 2010-13. Therefore, in nominal effective terms the current value of the pound sterling is not too low.

It is also worth considering an even longer time period, and the real exchange rate, which adjusts nominal exchange rates with inflation differentials. The pound sterling real exchange rate against the US dollar is about 16% below the historical average of 1970-2016, as shown in figure 2. This is low, but not unprecedented. In nominal effective terms against 41 trading partners, it is 8% below the historical average, but well above the values observed after the collapse of Lehman Brothers in September 2008. Moreover, the fall of the pound sterling was also smaller this time than in 2007/08 (at least up to now).

So although the British currency has lost a lot of its value right after  the Brexit vote, from a historical perspective neither the fall of the exchange rate, nor its current level is unprecedented, and the situation is not as severe as it was in the aftermath of the Lehman Brothers collapse.


About the authors

  • Zsolt Darvas

    Zsolt Darvas is a Senior Fellow at Bruegel and part-time Senior Research Fellow at the Corvinus University of Budapest. He joined Bruegel in 2008 as a Visiting Fellow, and became a Research Fellow in 2009 and a Senior Fellow in 2013.

    From 2005 to 2008, he was the Research Advisor of the Argenta Financial Research Group in Budapest. Before that, he worked at the research unit of the Central Bank of Hungary (1994-2005) where he served as Deputy Head.

    Zsolt holds a Ph.D. in Economics from Corvinus University of Budapest where he teaches courses in Econometrics but also at other institutions since 1994. His research interests include macroeconomics, international economics, central banking and time series analysis.

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