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Chart of the Week

Wednesday
Jun292016

Week 26, 2016: UK Historical Exchange Rates

Summary: As a result of last Thursday's "Brexit" referendum, the British pound suffered two days of intense devaluation, and although it has steadied in the last 24 hours, this week's chart shows that this has been the sharpest 2-day fall since the era of free-floating currencies began in 1971.

What does the chart show? The chart shows the value of the British pound (GBP) in US dollars (USD) at the end of each day of trading, indexed so that the day before the sharpest two day devaluation is equal to 100, for the ten days before and the thirty days after the four fastest historical devaluations. In 1992, "Day Zero" was 15th September; in 2008, 20th October; in 2009, 16th January; and in 2016, 23rd June. For the most recent period, we've taken the midday value of 29th June as the latest figure.

Why is the chart interesting? Having expected a "Remain" vote in last Thursday's referendum, the markets reacted strongly to the 52%-48% win for the "Leave" campaign.  The strongest economic impact was seen in the currency markets, where the value of the pound plummeted more than 10% against the dollar over Friday and Monday.  Although the pound appears to have stabilised for the moment, you can see from the chart that this is the steepest two-day devaluation by quite a long way. In similar situations in previous years, it has taken five days to reach the immediate trough; we appear to have reached that much earlier this time, although the trough is still deeper than in 1992, 2008, or 2009.  However, in 1992 and 2008, although there was a brief rally on both occasions, the pound continued to lose value over a thirty day period, so it is very possible that we haven't seen the end of this situation yet.

Looking back at previous periods, 1992 ("Black Wednesday") was marginally worse than 2008, especially since the pound had started to fall in value a week before the crisis point, but in general they followed a very similar trajectory.  2009 was not quite as bad, and the pound had recovered its value well within a month.  Although the pound has broken records this week, the important thing will be where it eventually settles for the medium term.