Sterling sinks to lowest level since 1985 as Brexit effects unfold
28/Jun/2016 • Currency Updates•
The Pound plunged against its major peers again on Monday, with financial markets still reeling from the shock announcement that Britain voted to leave the European Union at last Thursday’s referendum.
Sterling tanked in excess of 3% versus the US Dollar yesterday from Friday’s close, in the process falling to a fresh 30 year low against the Greenback.
The UK currency also depreciated over 2.5% versus the Euro, with investors beginning to speculate on both the economic and political ramifications for the UK and Europe following last week’s Brexit result.
Political situation continues to worsen
The UK political situation is still in disarray, with the country in search of a new Prime Minister following David Cameron’s resignation. Boris Johnson’s half hearted attempt at optimism was promptly dismissed by the markets. Jeremy Corbyn now also looks increasingly unlikely to remain leader of the Labour Party after a string of shadow cabinet ministers resigned from their posts on Monday.
Comments from Chancellor George Osborne yesterday morning also did little to sooth financial markets, which look set for a prolonged period of financial uncertainty after David Cameron claimed that the UK wouldn’t immediately trigger exit talks.
Activation of the famous ‘Article 50’, which would set the two-year clock ticking on the UK’s exit from the EU, remains a complete mystery. Cameron will not do it and it is quite possible that Parliament approval would be needed, throwing yet another obstacle in the way.
A minority of commentators are starting to speculate that ‘Article 50’ will never be triggered. They cite the precedent of the Denmark 1992 referendum on the Maastricht treaty, which initially came out negative. Further concessions were made and a repeat referendum approved the treaty by a large majority.
Bank shares tumble again
Banks got smashed again but recovered from their lows following Friday’s dismal showing. The absence of idiosyncratic moves is a reassuring sign that none of them are in immediate trouble.
Markets await Bank of England action
Investors are looking ahead to a reaction from the Bank of England, which confirmed it stands ready to guaranteed stability after providing £250 billion in additional liquidity.
We think that the impact on the UK economy from a Brexit in the short term will undoubtedly be negative and see a very good chance that the Bank of England could cut interest rates from their already record low levels should growth be in danger of slowing in the coming months. Financial markets are already pricing in a 25 basis point cut by the BoE at the central bank’s July meeting.
We therefore see scope for further declines in the Pound over the coming weeks as data confirms a UK economic slowdown and expectations increase for BoE action. This is highly dependent on whether the central bank chooses to intervene in the currency market in order to shore up the value of Sterling, which at one stage yesterday was 12% lower than Thursday night’s high.
Economic data out of the UK in the next couple of weeks will be fairly meaningless, as it has been rendered obsolete by the referendum surprise. The first key data point is out in the third week of July, with the CBI business optimism data. More rigorous indications of the impact on business investment will have to wait for the first week of August, when the July PMI’s are published.
Other major currencies:
The Euro depreciated 0.5% against the US Dollar yesterday as concerns over contagion grow in the Eurozone.
We’re already seeing calls in other European countries for a similar referendum, most notably in the Netherlands, France and Austria.
German Chancellor Angela Merkel has sought to alleviate pressure from Paris, Brussels and her own government to force Britain into negotiating a quick exit from the EU, despite warnings from some corners that hesitation could let populism take hold.
President of the ECB Mario Draghi will be speaking in Portugal today as part of a three day conference on central banking, with the topic of Brexit likely to be on everyone’s lips.
The US Dollar rose 0.5% against its major peers on Monday, with investors continuing to favour the safety of the Greenback over riskier assets.
Economic data out of the US continued to remain fairly upbeat yesterday. Markit’s composite PMI for June increased this month following an improvement in manufacturing growth, rising to 51.2, from 50.9.
Despite the still reasonably strong economic data in the US, investors began discounting the possibility an interest rate hike by the Fed from the moment the UK referendum result was announced. Financial markets are now placing just a 15% chance that the Fed will raise rates by the end of the year.
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