The British pound has plummeted to its lowest level since 2023, as a broad selloff in UK markets continues to weigh on investor sentiment. The pound sterling fell to $1.19 against the US dollar on Tuesday, its weakest level since March 2023, as concerns over the UK's economic outlook and Brexit-related uncertainty persist.



The pound's decline comes amid a broader selloff in UK markets, with the FTSE 100 index falling by more than 2% on Tuesday. Investors are increasingly concerned about the UK's economic prospects, as the country grapples with the fallout from Brexit and the ongoing impact of the COVID-19 pandemic.

Brexit-related uncertainty has been a significant factor driving the pound's depreciation against the euro and the US dollar. A study using event-study techniques found that Brexit-related news, including the referendum itself, has an impact on British pound exchange rates. Bad Brexit news is associated with a depreciation of the British pound against the euro and the US dollar, while 'good' Brexit news appreciates the pound against the euro (Source: Abstract).

The pound's depreciation has also been driven by a substantial decrease in the preference of financial institutions to hold investments denominated in pounds. This is due to the expectation that investments in assets denominated in pounds would perform worse following the vote for Brexit (Source: Why do exchange rates change?).

Increased trade frictions and uncertainty have also contributed to the pound's depreciation. Expectations of increased trade frictions between the UK and its largest trade partner, as well as increased uncertainty and persistent political instability, led financial institutions to sell the pound. As more and more organizations sold sterling-denominated assets, the value of the pound was driven down relative to other currencies (Source: At the start of 2021, the pound was approximately 15% weaker relative to the euro than it was on the eve of the referendum on the UK’s membership of the European Union (EU) in June 2016).

The UK's persistent current account deficit also increases its reliance on international capital inflows, making the pound more vulnerable to the movements of international capital. This is because the current account deficit has been increasingly funded by these capital inflows (Source: Why did Brexit make the pound less attractive?).

Brexit-related news has significantly influenced the volatility of the British pound exchange rate. An event-study analysis found that Brexit-related news has a measurable impact on the volatility of the British pound against both the euro and the US dollar. The referendum itself had a significant impact on exchange rate volatility, with the pound depreciating sharply against the euro and the dollar in the aftermath of the "Leave" vote (Source: Abstract).

The study also revealed an asymmetric volatility pattern, with bad Brexit news being associated with a depreciation of the British pound against both the euro and the US dollar. In contrast, good Brexit news appreciated the pound against the euro. However, the impact of good Brexit news was statistically more significant and had a higher magnitude than that of bad Brexit news (Source: Abstract).

Market participants displayed a delayed reaction to bad Brexit news, suggesting that the impact of such news on exchange rate volatility may not be immediate but rather unfolds over time (Source: Abstract).

Brexit surprises have had a significant impact on the UK's GDP growth and CPI inflation. According to a study by the Bank of England, an adverse Brexit surprise lowers GDP growth while raising CPI inflation. This means that unexpected negative events related to Brexit, such as delays in the withdrawal process or political instability, can lead to a decrease in economic growth and an increase in inflation. Conversely, positive Brexit surprises, like smooth progress in negotiations or a favorable trade deal, can boost GDP growth and lower CPI inflation. This finding is consistent with the Bank of England's efforts to mitigate a worse economic contraction during the Brexit process.

As the UK continues to grapple with the fallout from Brexit and the ongoing impact of the COVID-19 pandemic, investors are increasingly concerned about the country's economic prospects. The pound's depreciation against the euro and the US dollar, as well as the broader selloff in UK markets, reflects these concerns and the uncertainty surrounding the UK's future. As the UK navigates the complex and challenging landscape of Brexit and the post-pandemic recovery, it will be crucial for policymakers to address these concerns and work to restore investor confidence in the UK economy.