Pros And Cons Of Brexit on the British Pound

Almost ten years after the referendum, the pros and cons of Brexit are visible not just in politics but in hard market data. The UK economy has followed a different path from its European neighbours, and the British pound has become one of the clearest barometers of that shift.

To keep things practical, this article briefly recaps the main pros and cons of Brexit, then focuses on what really interests traders and investors how Brexit affected sterling, inflation and the UK’s risk profile in currency markets.

Brexit And Its Main Pros And Cons

Brexit refers to the UK’s decision to leave the European Union after the June 2016 referendum, its formal exit in January 2020, and the new trade agreement that took effect in 2021.

Supporters point to three main advantages:

• Sovereignty: Parliament regains full control over laws, regulation and courts.
• Independent trade and migration policy: The UK can negotiate its own trade deals and run a single points based immigration system.
• Budget and policy freedom: Net contributions to the EU budget stop, and domestic governments decide how to redirect funds and design support for regions and sectors.

Critics emphasise the costs:

• Weaker growth and investment: A leading 2025 study estimates that by 2025 Brexit has reduced UK GDP by around 6 to 8% compared with staying in the EU, with business investment and productivity clearly lower as well.
• Lower trade with the EU: The European Central Bank and other researchers find UK EU trade has fallen by around 10 to 25% versus a remain scenario, reflecting new frictions in both directions.
• Lasting uncertainty and higher costs for firms: Especially in goods, complex supply chains and smaller exporters.

These economic outcomes are exactly what currency markets have been pricing into the pound since 2016.

How Brexit Hit The Pound In Numbers

The Immediate Shock

When it became clear that the Leave side had won, the pound fell sharply. On the morning after the vote, sterling dropped to its lowest level against the US dollar since 1985 and was on course for its biggest one day loss in modern history.

The move was not a minor adjustment. In a matter of hours, markets had to reprice:

• A different trade regime with the UK’s largest partner
• Years of political negotiation and uncertainty
• A weaker long term growth outlook relative to remaining in the EU

For traders, this was phase one of Brexit in FX a historic repricing driven by a sudden change in expectations.

From One Off Move To Persistent Discount

What matters for the pros and cons of Brexit is not just that the pound fell, but that it stayed down.

Over the following years:

• The pound remained significantly weaker on a trade weighted basis than before the referendum.
• Against major currencies, it traded well below its 2015 and early 2016 levels, even during periods of global risk appetite.

Economics Observatory and other analysis point out that this was not random volatility but a sustained “Brexit discount” driven by:

• Higher expected trade costs with Europe
• Lower expected growth and productivity
• A higher risk premium demanded by investors to hold sterling assets

In other words, the cons of Brexit as seen by markets showed up as a weaker and more fragile pound.

Growth, Trade And What They Signal For Sterling

By 2025, several strands of evidence line up:

• The Stanford based “Economic Impact of Brexit” study finds UK GDP around 6 to 8% smaller than if the UK had remained in the EU, with investment down and productivity lower.
• The European Central Bank’s review suggests UK EU trade has fallen by 10 to 25% in both directions compared with a synthetic remain path.
• The UK’s Office for Budget Responsibility judges that Brexit will leave long term productivity roughly 4% lower than it otherwise would have been.

These figures matter because currencies are forward looking. Lower expected growth and productivity, and weaker trade, mean lower expected earnings and dividends in sterling. That is a clear negative for the pound in the medium term.

Inflation, Real Incomes And The FX Channel

The post referendum fall in sterling did not only hurt investors. It also pushed up prices for households.

Because the UK imports a large share of food, energy and consumer goods, a weaker pound raises the local currency cost of those imports. Studies find that:

• The depreciation after the referendum added a noticeable amount to UK inflation in 2017 and 2018
• Higher prices squeezed real wages, leaving households worse off than in a remain scenario

This is a clear example of how a macro level con of Brexit weaker currency, weaker external position filters down into everyday life.

Three Phases For Sterling After Brexit

You can think of the pound’s journey through three broad phases.

1. Shock
   The surprise Leave result led to a historic one day fall and the largest drop among major reserve currencies in decades.
2. Discount
   As negotiations dragged on and the risk of a very hard Brexit or no deal exit ebbed and flowed, sterling remained under pressure. Volatility spiked around key votes and deadlines, and correlations with other majors shifted as traders treated the pound as a risk sentiment barometer.
3. Partial Recovery
   Once the Trade and Cooperation Agreement came into force and political headlines calmed, the pound regained some ground. On a trade weighted basis, it moved closer to its pre referendum range, but not all the way back, and investors still treat it as more volatile and more headline sensitive than before 2016.

Through all three phases, the common thread is that the market has had to weigh the pros and cons of Brexit and assign a price to UK risk.

What This Means For Traders And Investors

For traders, the key takeaway is that Brexit has changed both the level and behaviour of the pound.

• Level: The UK now carries a structural discount relative to the remain world that many economic models had forecast. Even with some recovery, the pound still trades in a range that reflects weaker trade and productivity expectations.
• Behaviour: Sterling reacts more sharply to UK specific headlines, particularly those involving relations with the EU, regulatory changes or fiscal policy. It also requires more active hedging for institutions that do not want currency swings to dominate their returns.

For long term investors, the pros and cons of Brexit show up in asset allocation decisions. A credible plan to use new freedoms to raise productivity and rebuild EU relations can slowly reduce the risk premium on sterling. Continued uncertainty, by contrast, keeps that premium in place.

Final Thoughts

In political terms, the pros of Brexit are mainly about control over laws, borders and deals. The cons are about economic costs. In currency terms, the verdict so far is clear.

Brexit delivered a weaker pound, higher inflation and a higher risk premium, then a partial recovery as the new relationship with Europe settled. Whether sterling can fully shed its Brexit discount now depends on what the UK does with the freedoms it has gained and whether future policy choices rebuild confidence in the long term story behind the currency.