Sterling immediately drops 11% on Brexit result
24/Jun/2016 • Currency Updates•
We woke up today to the shocking news that the United Kingdom has voted to leave the European Union.
The long term implications are unclear and will depend on complex and protracted negotiations. However, the immediate consequences are clear.
The Pound experienced its worst few hours since at least 1992, dropping over 11% in Asian trading to its lowest level in 31 years against the US Dollar. It also dropped around 8% against the Euro and similar amounts against most other major currencies.
Major stock markets are expected to open down 5-10%, as a general flight to safety punishes all risk assets and money flows into the safest Government bonds and cash.
In the short term, much will depend on the reaction of monetary and financial authorities, led by central banks. There are already rumours that the Bank of Japan intervened early this morning to stem Yen appreciation. The reaction of the Bank of England will be critical; we expect a cut in interest rates in order to mitigate the potential shrinkage of UK investment and growth. No doubt emergency meetings are being held in Frankfurt and Washington and we expect to see action if markets fail to stabilise.
We think that the market may not be sufficiently pricing in the negative political and economic impact on the rest of the European Union. Already we are seeing calls in other European countries for a similar exit referendum. Uncertainty over closer fiscal and economic union will increase and, in our view, the institutional development of the monetary union will become significantly more difficult.
Even after last night’s Euro sell-off, we think current EUR/USD levels do not sufficiently reflect this worsened political backdrop and we expect to see the common currency trend considerably lower than current levels over the next weeks and months.
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