Monday, 3 April 2017

Brexit, Currency and biased thinking

The debate surrounding Brexit is largely informed by confirmation bias, which is a tendency to search for, and interpret information, in a way that confirms one's pre-existing beliefs. Those that voted Remain may bury themselves in the pages of the Guardian, BBC or Independent that give warnings of economic doom and nurture the idea that the whole thing can be undone. It cannot.

Equally those that voted to leave may ignore the pitfalls of leaving the EU, including information and evidence that leaving the EU will be bad for the economy, viewing Brexit through rose tinted glasses, the Telegraph, Express or Daily Mail. Again, any good news is seen as defying ‘Project Fear’ when actually, the true cost and effects of Brexit on the economy are unknown, and will remain so for some time.

The reality is that there will be both positives and negatives; whether the positives will outweigh the negatives remain to be seen, and we have a few years to wait before we know what the UK economy, and our relationship with the EU, will be like once we leave the EU in 2 years. Only then will we all know whether the benefits will outweigh the costs in the long term. A conservative MP last week recalled the words of Sir Francis Drake in wishing Theresa May good luck and fortune in the negotiations, that I thought apt:  

“There must be a beginning of any great matter, but the continuing unto the end until it be thoroughly finished yields the true glory.” 

Sterling to remain volatile as negotiations begin


The negotiations will be bitter and will focus on both the exit terms and interim agreement on trade, before a final trade agreement is reached, that may well take longer than 2 years. The veto that the EU have given Spain over Gibraltar illustrates how one issue can jeopardise the entire unanimous agreement we need to get a deal. While the negotiations are ongoing, Sterling will be susceptible to commentary that will be coming from the UK government and the EU, and any indications as to how the negotiations are unfolding will likely have a big impact on the value of Sterling against other currencies. If you think that the last 9 months were volatile for the currency markets, brace yourself, as the next 2 years are likely to be even more so. Let’s hope that the both the UK & EU abide by Article 8 of the Lisbon treaty that is in the interests of both parties:  

“The Union shall develop a special relationship with neighbouring countries, aiming to establish an area of prosperity and good neighbourliness, founded on the values of the Union and characterised by close and peaceful relations based on cooperation.” 

A similar Bias can be seen when needing to convert currency


Confirmation bias can also be seen when our clients make very important financial decisions regarding fixing an exchange rate. A client that needs to buy a large amount of Euros, for a property purchase for example, will obviously want the exchange rate to go up. They may then search the Internet and read news reports for information that validates their hope that this may happen. In exactly the same way, a client that needs to convert funds back to Sterling will give more weight and credence to anything that suggests the Pound may weaken while filtering out any information to the contrary. It’s natural to want to make the most of your currency but with this bias subtly affecting your decision making, it may not be the best way to go about it.

It’s here that we can help. We don’t only offer exceptional rates of exchange, we offer a full consultative service to help understand your requirements, time-frames and attitude to risk, to be able to explain the different options you can consider. When you need to exchange currency your decision process is likely driven by your heart and not your head. Our expert brokers do not have the same emotional attachment to your trade, and can therefore provide a clearer view of what is happening based on facts, not hope. In this way you can ensure that confirmation bias is not working insidiously inside your mind, potentially skewing your view on the timing of your trade.

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