Pre-Brexit: the EU referendum as an illustration of the effects of uncertainty on the Sterling exchange rate

Exchange rates are determined by many factors. However, the UK referendum on EU membership June 2016 provides an unusual circumstance in which one can reasonably assume that one factor is overwhelmingly influential for a reasonably well-defined period. This concise study explores the period of uncertainty created by the referendum. The focus is the UK real effective exchange rate. The study applies a reduced form exchange rate model, first introduced by Edwards (1994), and makes use of Bank of England daily data, from the period November 2015 to July 2016. The results indicate a sharp depreciation of Sterling with reference to its long-term trend. We set out some of the possible contexts which may account for fluctuations during the referendum campaigning period. This can be distinguished from other longer-term factors likely to be previously responsible for trend depreciation, and also from the further sharp depreciation effects triggered by the referendum outcome.