Impact of Brexit on UK Equity and Foreign Currency Markets: Analysis

This report examines the impact of Brexit on the UK's financial markets, focusing on the period from June 23, 2016, to December 2017. It analyzes the performance of the UK equity market using the FTSE 100 index and the foreign currency market, specifically the GBP/USD exchange rate. The analysis reveals a positive trend in the equity market, with the FTSE 100 increasing in value, while the GBP/USD exchange rate experienced devaluation, indicating a strengthening of the USD against the GBP. A negative correlation was identified between the UK stock index and GBP value. The report explores the relationship between these trends, attributing the changes to shifts in investment patterns and currency flows influenced by Brexit. The conclusion highlights the contrasting impacts of Brexit on the equity and currency markets, emphasizing the negative effects on currency valuation while the equity market saw growth, and the influence of Brexit on the UK and world economy.

Running head: INTRODUCTION TO FINANCIAL MARKETS
Introduction to Financial Markets
Raja Tayab Hussain
University of Westminster
Authors Note:

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Introduction:
The main highlight of the essay is to identify the impact of Brexit on the performance
of the UK equity and foreign currency market. In addition, the time period between 23rd June
2016 to the end of December 2017, which help in determining the performance of the equity
and currency market of the UK. The FTSE 100 index is used for analysing the performance
of the UK economy after the decisions of Brexit. On the other hand, the GBP/USD value has
been taken into consideration for determining the fluctuations that incurred after the Brexit.
Performing correlation analysis, while comparing and analysing the two mentioned
trends:
5,500.00
6,000.00
6,500.00
7,000.00
7,500.00
8,000.00
FTSE 100
The above graph provides adequate information regarding the performance of UK
Equity market and currency market for the tenure is from 23rd June 2016 to the end of
December 2017. The analysis has directly indicated that the performance of the equity market
has increased in value, as detected in the above figure. The values have increased from the
level of 5,982.20 to a high of 7,687.77, which provides a positive indication of the future
growth of the UK equity market. The above figure has directly indicated that the relevant

INTRODUCTION TO FINANCIAL MARKETS
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increment in values of FTSE 100 has been witnessed after the declaration of the Brexit by the
UK government. Hobolt (2016) mentioned that investors using the share price trend is able to
understand whether the capital market is in an up or down trend, which eventually helps them
to make adequate investment decisions.
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12-Jul-16
1-Aug-16
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30-Sep-16
20-Oct-16
9-Nov-16
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19-Dec-16
8-Jan-17
28-Jan-17
17-Feb-17
9-Mar-17
29-Mar-17
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8-May-17
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17-Jun-17
7-Jul-17
27-Jul-17
16-Aug-17
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14-Dec-17
1.1
1.15
1.2
1.25
1.3
1.35
1.4
1.45
1.5
GBP/USD
The analysis of the exchange rate of GBP against USD has directly indicates the
devaluation of the currency, which has taken palace during the tenure. In addition, the
evaluation of currency pattern has indicated that the values of GBP/USD have mainly
declined during the period, which indicates that USD has strengthened against GBP. This
also indicates that GBP valuation has deteriorated after the announcement of Brexit by the
United Kingdom. The above figure also states that after 2017 the overall increment in GBP
value against USD has been rising, which indicates that the current trend of the GBP value
has been presenting positive attributes. The sudden decline in GBP values was seen during
the period of the announcement. However, from 2017 the value of GBP started to increase,
which is directly indicating an increment in the currency value against USD (Becker, Fetzer
and Novy 2017).

INTRODUCTION TO FINANCIAL MARKETS
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22-Jun-16
12-Jul-16
1-Aug-16
21-Aug-16
10-Sep-16
30-Sep-16
20-Oct-16
9-Nov-16
29-Nov-16
19-Dec-16
8-Jan-17
28-Jan-17
17-Feb-17
9-Mar-17
29-Mar-17
18-Apr-17
8-May-17
28-May-17
17-Jun-17
7-Jul-17
27-Jul-17
16-Aug-17
5-Sep-17
25-Sep-17
15-Oct-17
4-Nov-17
24-Nov-17
14-Dec-17
1
1.1
1.2
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1.5
1.6
5,000.00
5,500.00
6,000.00
6,500.00
7,000.00
7,500.00
8,000.00
GBP/USD FTSE 100
The correlation analysis between the UK stock index and GBP value has directly
indicated a negative value. The correlation has indicated a negative value of -0.07567957,
which directly indicates that when the index increases in value the overall GBP values
decline. Therefore, the negative correlation between the index and the currency is also
detected from the above figure, which directly states about their price action. From the
evaluation, it is mainly detected that whenever the value of the index increases the currency
value of GBP decline against USD. In this similar instance, whenever the value of GBP
increases the value of FTSE 100 declines, which directly supports the value of correlation
derived from the calculation. Menon and Salter (2016) mentioned that with the help of
correlation calculation the investors are mainly able to formulate their investment strategy,
which can help in minimising the risk involved in the investment.
Therefore, from the valuation, it can be detected that the FTSE 100 is having an
uptrend from the start of the event. On the other hand, the GBP/USD values in the first were
in downtrend, which reduced the actual valuation of GBP, whereas after 2017 the currency is
currently in an uptrend. Hence, the calculation has directly indicated that the decision of
Brexit had a positive impact on the equity market of United Kingdom, whereas the currency

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market did not respond adequately to the decision made by the UK government. This mainly
led to the decline in the currency valuation of the UK against USD.
Arguing about the relationship between two trends, while explaining the possible
reasons for the behaviour trend:
The changes in the current values of both FTSE 100 and GBP/USD are due to the
presence of the relationship, which directly affects their pricing and value. The United
Kingdom is considered to be one of the largest investment hubs in the world, where
increment in the current financial prospects of the country is seen after the occurrence of
Brexit. This would eventually raise the level of investments that can be conducted in the
United Kingdom in terms of foreign direct investment. The evaluation has directly indicated
that in the anticipation of the Brexit the overall increment in the current foreign direct
investment has been conducted, where investments in the home region have relevantly
increased in the market. This has mainly helped in boosting the FTSE 100 value, whereas the
currency market is directly influenced by the currency conversion rate against USD and EU.
(Goodwin and Heath 2016)
The UK economy was partially accepting the payments in Euro for pegging the GBP
and increasing its value against currency pairs like USD and EUR. After the announcement,
the increment in the flow of GBP led to the massive decline in the currency value, as
payments to UK will no longer be accepted in EUR. Moreover, the increment in foreign
direct investment raised the demand for GBP in the international market and raised its flow in
the currency market. This is the main reason behind the sudden decline in the value of GBP
after the announcement of Brexit. Therefore, concrete relationship is present between the
currency and the equity market of United Kingdom.

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Conclusion:
From the relevant analysis, it can be detected that the currency market had a negative
impact from the decision of Brexit. On the contrary, the equity market of UK has a positive
impact on the Brexit, where the value of FTSE 100 has been rising since the decision. There
is negative correlation between the equity and currency market, which is the main reason why
one increases and other decreases in value at the same time. Brexit has portrayed major
changes in UK and world economy, as balance of trade has shifted due to the exit of UK from
Euro Zone.

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Clarke, H.D., Goodwin, M.J., Goodwin, M. and Whiteley, P., 2017. Brexit. Cambridge
University Press.
Dhingra, S., Ottaviano, G., Sampson, T. and Van Reenen, J., 2016. The impact of Brexit on
foreign investment in the UK. BREXIT 2016, 24, p.2.
Goodwin, M.J. and Heath, O., 2016. The 2016 referendum, Brexit and the left behind: An
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Hobolt, S.B., 2016. The Brexit vote: a divided nation, a divided continent. Journal of
European Public Policy, 23(9), pp.1259-1277.
Menon, A. and Salter, J.P., 2016. Brexit: initial reflections. International Affairs, 92(6),
pp.1297-1318.
Sampson, T., 2017. Brexit: the economics of international disintegration. Journal of
Economic Perspectives, 31(4), pp.163-84.