THE IMPACT OF BREXIT ON THE POUND STERLING

The United Kingdom decision to leave the European Union, the so-called Brexit, caused a major economic shock for the U. K. This paper analyses the impact on the Pound, by looking at GBP/USD and GBP/EUR exchange rates. Both these exchange rates were in fact volatile post-Brexit, especially immediately after the referendum held on 23rd of June 2016. Since then however, the pound has become more stable. In the paper we use generalized autoregressive conditional heteroskedastic (GARCH) model for modelling monthly and daily returns and forecast volatility of the aforementioned currency pairs. We also descriptively analyse possible influences of exchange rate volatility on the trade of Great Britain with two most important trading partners -European Union and United States. As the process of Brexit develops in the next two years (until March 2019), the pound can be expected to fluctuate again, due to many other factors which are putting pressure on the pound sterling right now, both economic, like domestic and foreign demand, and political ones.