How British Political Instability Affects the Value of the Pound

Document Type:Dissertation

Subject Area:Finance

Document 1

The present research method proposal focuses on how British political instability has had an effect on the exchange rate within the past 10 years, starting from when it was at its highest in 2007, and whether it be positive or negative relationships. The pound as a currency has undergone a general weakening trend compared to the dollar as well as other major currencies. Nonetheless, the British government has been working towards reinforcing the currencies reputation through the legal actions. So as to restore the currency, the government should eliminate both political and economic uncertainty. The present study focuses on how British political decisions have caused inclines or declines regarding the exchange rate which overall has an effect on day to day spending habits, trade amongst Great Britain and outside of the country.

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2 Research aim and Objectives 2 2. 0 Literature Review 4 2. 1 Theoretical concept 4 2. 2 Empirical review 6 3. 0 Research Methodology 12 3. 0 Conclusion and recommendations 27 6. 1 Conclusion 27 6. 2 Recommendation of the study 28 References 29 1. 0 Introduction 1. 1 Research Background The exchange rate is the price of a country’s currency in relation to another currency. Article 50 is the plan which is set for the countries who wish to exit the European Union. It became a law in the year 2009 as result of the agreement which was signed by all the EU countries as it was brought into action by Treaty of Lisbon. This article spells it out clear that in case any member of EU wishes to come out the agreement, the state should notify the European council for final negotiation of whether the reason for withdrawal is valid or not.

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This process takes 2 years until they can reach the final agreement, unless all agrees to extent it further. The exiting country is not allowed to take part in the discussion of the whole process (Duff, 2016) Meanwhile the deal to exit is mandatory to be approved by “qualified majority” that is at least 72% of the 27 states remaining, with 65% of the whole population being represented. It should also aim at bringing up the required solutions to the realised causes of the economic disparities, answers to the provided questions and seek to provide recommendations to the whole research study. The event should also try to come up with solutions to Article 50 and the referendum which has impacted heavily on GBP currently and ways on how the article can be reversed.

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0 Literature Review 2. 1 Theoretical Concept Naturally British political instability is not the only factor to have an effect on the exchange rate of the GBP, according to Robert Plummer (O'Reilly et al, 2016), the sharpest fall in the GBP exchange rate last year was due to the fact that the Bank of England did not follow what was expected from it after the US Federal Reserve’s made a decision to raise the interest rate. However, the biggest reason for the GBP exchange rates recent fluctuations are down to Brexit. ) shows evidence that the GBP has dropped in value since the decision was made, making the GBP volatile against other currencies such as the Euro and US Dollar. The fluctuations of the GB Pound against the Euro are between 1.

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143 EUR per GBP and 1. 159 EUR/GBP and a fifth against the USD. Generally, if the negotiation between the states and the EU appear to be faring well, the pound itself will most likely appreciate. When Macron was asked if the EU would make verbal concession so as to allow may make the Brexit deal, he responded that there exist no room for such unsanctioned concessions. Macron starting point was very realist, for he said that Europe has not actually freedom as well as peace for the past seventy years and all of its achievement are at threat. So as to avoid sleepwalking into tragedy, what is needed most is the European sovereignty. The foreign currencies are at risk since the transactions are so sensitive to fluctuation against the exchange rate, so the UK need to make the right decisions in choosing which currency to employ therefore improving the UK value in trade.

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The drastic slide in sterling pound since the idea of Brexit started has brought very big shock to the citizens. T et al, 2017). From my direct observation and experience of the recent election, I have seen that there have been positive relationships regarding the British political decision making and how the GBP is affected. For example, the most recent snap election called by Theresa May this year had the value of the GBP go up slightly. During the election, the value of the GBP was seen to fall during the day of election when the labour party was seen to have the lead in votes. However, once it was announced that the Conservatives had won, the GB pound’s value increased again.

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, 2018) suggested that UK and EU has a need to agree in an interim trade deal which can be applied in the cases where the Article time elapses. Whereby the interim will help based on the EEA approaches, hence allowing UK to secure membership in some mono markets with Britain having a chance to strike their own deals of trade beyond the borders of the EU union customs. Triggering of the article 50 refers to the invocation of the act, through giving an official withdraw to the EU council so as to allow the beginning of withdraw negotiations, meeting the requirements of the EU treaty. After the triggering it can never be reversed, thus the notification allows room for reconsideration and after that no return.

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The revocation of the notification is allowed but is subjected to a condition set by EU27, thus no member state can improve on the current items concerning the membership terms. May on 19th April 2017. This election opt to bring great positive impact on pound by providing the conservative party in parliament with stronger majority members which in turn will yield an additional support to the Mrs. Theresa. This resulted too many questions as the prime minister opt to secure the big portion in the House of Commons. Also it was thought to could have enabled Theresa to pull off the so called Brexit. However, this condition was hard to predict the market fluctuations during that short period of time. But Dean Turner, conveyed that the reaction can be made after like a period of 50 days, where one can be able to give a clear judgment.

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Though the rally brought the pound in to a peak price during a period of six months, there followed a drastic deteriorated in the pound value in 23rd June 2016 due to Brexit referendum where voters supported the idea to leave EU. During this time the value was US$1. 4787 which traded but this was followed by 10% decrease on 27th June that is US$1. The drafted guidelines dismissed all this as help yourself that would later on undermine the already existing single market. The president of the European council, Mr Tusk ridiculed the ideas as a pick and mix approach. He went on a head and insisted that, because of her red lines of leaving the European Union’s single market as well as the custom union, hindering people free movement, and evading the European court of justices.

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Mr. Tusk suggested that the approach should be more ambitious as well as cover all good, however it should be more restricted for services. This is because the government is in chaos which is a big problem for her to get the interested settled rather than serving the citizens as her proposed mandates. The resignation of Davis has yield and challenged idea of leaving the EU because many have realized themselves and now turning to overcome the proposed idea from the prime minister. However, the pound depreciated drastically this had some positive impact to the entire global market investors. This is was because the low the valued the cheaper the UK exports which will attract many buyers in exchange, also this will motivate tourists since the level of living standard will be genuine and affordable.

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Meanwhile it will make it hard for people who have been paid or who have pounds to import goods or make tours in abroad. 0 Research Methodology 3. 1 Primary Research Gigi DeVault (2017) states that primary research is designed to meet your unique and specific needs. The research is to be conducted by the person wanting the answer or by a research firm hired for the project. Primary research will normally include focus group, interviews and observations. There are two forms of primary research, Exploratory and Specific. When a significant political decision was made, we want to be able to see whether that decision had impacted the GBP exchange rate in a negative or positive manner. The events of which the exchange rates daily fluctuations will be correlated to will be found via news websites such as the BBC and what political decisions are being made by the British Government.

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Also, political policies will be looked at to see how they effects the exchange rate to really give a bigger picture on what types of decisions effect the exchange rate and how. Also as we want to find out how trade between Great Britain and other countries has been effected during these periods of British political instability, trading habits i. e. The general explanation is that the market anticipates lower volumes for the future of the UK European union international affiliation as well as the long-term growth of the projection UK is revised. The rise in the level of inflation has given rise to the challenging questions for the MPC member of the England bank, which aims at maintaining the inflation rate at two percentages.

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The monetary policy committee could use its tools to tighten the monetary policy by levitation of the interest rates so as to reduce the inflation rate. 5 Research Hypothesis As Brexit is the biggest and most recent significant political decision that is having a huge effect on the GBP exchange rate, the hypothesis for the present study is that the exchange rate of the GBP will continue to decrease until Brexit agreements have been finalized in 2020. On the contrary, the null hypothesis is that the GBP exchange rate will not be effected by Brexit. For the sake of accuracy I preferred to use the model period of 2007:02- 2017:12 as the basic training sampling method and keep the rate 2008:01-2016:05 for out –of-sample forecasting.

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The two method ideas that is out-of-sample being aligned with financial crisis affecting the global at large and the highly depicted behavior in (fig). After then we foresee ex-ante which is the exchange rate figure for June 2016. This is just but some the variety models of forecasting. The selection of the smallest root mean square which is an error in the unknown collected data for research, that is (out-of-sample foresee). There were therefore more male respondents than female in the research. Table: 1 the age of the respondent of the UK cabinet members Category Number of respondents Percentage number of respondents Below 20 years 0 0% 21-30 years 40 20% 31-40 years 79 39% 41-50 years 60 30% 51 years and above 22 11% Total 201 100% Source: Research data (2015) According to the table 1 above 39% of the respondents were aged 31-40 years, 30% were 41-50 years old, 20% were 21-30 years old while 11% were 51 years and above.

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Majority of the employees interviewed were above 20 years hence eligible to take part in a research of this kind. This enabled the researcher to get to know the general overview of what members of the cabinet and their reactions towards the Brexit strategy. From this data it came to conclusion that many members of the cabinet had a divided heart towards the proposed idea by the UK prime minister. As stated earlier, we employ the logarithmic differences in the case of the rate of exchange, using the UK EPU as well as the relative EPU index in this specific level. Moreover, we Eurostar our models so as to obtain the clearer hypothesis. Comparing our daily to the monthly frequencies, the EPU allows a clear forecasting of the post Brexit session.

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At this level we now use the forecasting model, basing our argument on the OLS as well as the SVR approaches. However, due to the increased dimensionality of the corrected data only the SVR model putting the kernel converged into consideration in a timelier manner. Therefore, the resultant values are interesting to maintaining the model in the figure 6 all the way to the 23rd of June and the rest gets ex-ante forecast. Figure 7, the ex-ante result after the Brexit are reported and recorded. The predictions are made using the six lag of exchange rate as well as the UK EPU indexes considering the quasi, the recursive level of transformation. As we see, it is clear that the forecast abides by closely with the evolution of the exchange rate with a two day delay.

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Thence the devaluation of the rate of exchange is viewed as a structural break that can be predicted if the UK EPU index is employed. However, a possible limitation stems around the fact that the exchange rate is always fluctuating. The exchange rate is not only effected by the British political decisions and it may be a matter of other determinants effecting it more but at the same time. For example, if the inflation and interest rate were to decrease at the same time as Theresa May decides to drop out of being the prime minister, who can actually determine which factor had a larger effect on the exchange rates fluctuation? Furthermore, which website the researcher decides to gather information from is very crucial in how trustworthy the actual data is? Which news articles or what exchange rates website the numbers are taken from will be a factor.

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Time Scale 6. 0 Conclusion and Recommendations 6. In 2007 the exchange rate was at its strongest it has been during this 10-year time frame and currently it is at its weakest with Britain going through such drastic changes following our decision to leave the European Union. The prime minister’s invoking of the Article 50 was enacted by the European Union. A letter signed by the Prime Minister Theresa May, was delivered by hand to the president of the European council, Donald Tusk. The letter was composed of the invocation of the Article 50 as well as the UK withdraw intention from the EAEC, as a result of reduced mutual interest and relation. In doing so, on 30th march 2019 the UK will no longer be a member of the European Union.

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The government should also build a fare playing ground for citizens and not for the sake of their benefits, the top most government employees should not be divided and should have good advisors. References Bergen, J.  6 Factors That Influence Exchange Rates. [online] Investopedia. Available at: http://www. php?YA=1&C1=GBP&C2=USD&A=1&YYYY1=2007&MM1=07&DD1=03&YYYY2=2017&MM2=07&DD2=03&LANG=en [Accessed 31 Jun. Meredew, O.  Article 50: What could it mean for exchange rates? [online] Express. co. uk. Holian, T. and Holian, T.  Donald Trump | Pound Sterling Forecast. [online] Poundsterlingforecast. com. , Halicioglu, F. and Ghodsi, S. Asymmetric Effects of Exchange Rate Changes on British Bilateral Trade Balances. Duff, 2016. Borderless Debate: After Brexit, What Will Happen? Article 50: How to Leave the European Union.

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