Written by Jonathan Watson, Chief Market Analyst – Foreign Currency Direct
Expats have been some of the biggest losers from Brexit so far, with serious questions raised over their legal status and rights plus a big dent to their back pockets from a falling Pound. With Sterling down around 17% against the Euro, which is the lowest we have seen since the vote to leave on June 23rd, purchasing Euros with Pounds has become much more expensive.
The big question of course is just what lies ahead for expats following Brexit, will this trend continue and just how bad could it get?
Technically and legally, nothing has changed since the vote to Leave in June 2016. All existing rights and obligations remain the same, and are likely to continue to do so beyond the current Article 50 finish date of March 2019. In another sense the relationship between the UK and EU – its biggest trading partner, has changed dramatically. We are unlikely to know the extent of this change for many months, possibly even years.
One area that has been affected considerably since the vote is the exchange rate, which saw the Pound slide in value, and remain under pressure ever since.
Whilst the prospect of a ‘softer’ Brexit is now more likely, which is in many respects positive for Sterling, a decline in the UK economy and political uncertainty are areas of concern for investment. Until markets get clarification on just what Brexit is really going to mean, Sterling could remain in the lower levels. Even then once we do know, if the markets don’t like the deal struck between the UK and EU the Pound could be confined to these levels for many years.
A softer Brexit is felt to be more positive for the Pound because it assumes membership or access to the Single Market, the all-important area of free trade within which EU members have free rein to buy and sell many important goods and services. This is also good for expats since a softer Brexit could mean more protection of expat rights and obligations in force under current EU membership.
A harder Brexit sees the UK coming out of the Single Market, and having more control over immigration which may not be good news for expats. This would create more uncertainty as to whether expats would still be entitled to many of the healthcare, tax and other benefits of being a British citizen living in the EU. It could also see Sterling at lower levels as it puts the UK in a more difficult position economically.
Many expats rely on UK based income such as pensions or investments to fund their overseas life. They may also have financial interests in the UK such as property or business interests, for which they might also be reliant on UK based incomes. A weaker Pound effectively acts to reduce their income. The 17% fall so far on the GBPEUR rate since the vote will have played havoc for many expats trying to manage their finances overseas. To keep track of exchange rates you can view live interbank exchange rates here.
Some expats are involved in businesses which depend on other expats, for example estate agency or the hospitality sector. They are likely to be hit by lower visitor numbers because of the poor exchange rate and uncertainty over legal status and travel restrictions.
What happens next?
The UK and EU are meeting monthly for negotiations, and though the issues to be discussed are clear, the outcomes are not. Difficulty on reaching agreement on such complex issues as reciprocal rights are to be expected, but this will be little comfort for expats seeking clarity.
It appears that nothing will be finalised soon, and expats might have to accept that their legal status will be downgraded in the future. The timescales are tight and it appears more than likely that there will be a transitional phase past the March 2019 deadline. Free movement is being mooted to carry on for some years past this date.
As the uncertainty continues for Brexit, so does the uncertainty for the Pound. Expats buying Euros with Pounds are getting doubly hit with the Euro faring very well at present. For all the political and economic uncertainty in the UK, there is ever increasing political and economic certainty within the Eurozone.
Expats who are heavily reliant on a UK Sterling based income should be very conscious of the fragile political and economic situation in the UK. There is a very real chance this will get worse before it gets better and those buying Euros should be making plans.
Currency services that allow better exchange rates than the banks, and can fix the exchange rate months in advance are vital to avoid paying too much on currency.
The potential for a softer Brexit is helping the Pound to avoid the precipice and might even lead to some strength in the future, as we get clarity over just what kind of deal the UK gets. The difficulty for expats interested in seeing the GBPEUR rate rise to the higher teens or even 1.20 is the Euro, as it remains a very strong currency.
The Eurozone of course has its own unsolved problems including Greek debt and the issues with Italian banks, but the German elections in September should see Merkel remain in power and help cement the wave of increased political certainty that has swept mainland Europe and should keep the single currency strong.
Expats costs look likely to remain high so planning for the future is vital, as the current trends that have seen the GBPEUR interbank rate slip to 1.11 look set to continue. Brexit is going to be a long journey and one that is full of bumps, with little clarity and plenty of speculation over outcomes. Unfortunately for expats the uncertainty is going to continue to impact the Pound.
Jonathan Watson is Chief Market Analyst at Foreign Currency Direct, a leading UK-based currency brokerage who specialise in international money transfers.