Pound Sterling plagued by Brexit Fears

Image via © European Union 2016 – European Parliament / Flickr

Summary:

• GBP falls strongly on Monday following growing support for the UK to leave the EU
• Ratings agency (Moody’s & Fitch) warns on the risks of a Brexit
• Euro likely to feel the Brexit heat as well
• 36 FTSE100 companies release a letter endorsing support for the UK to stay in the EU
• BoE will not make any judgments on the referendum’s outcome
• BoE will publish a report on March 8th on the risks to the UK’s economy following an exit from the EU membership

Just hours after British PM David Cameron returned from Brussels after renegotiating the terms for the UK’s membership in the EU, he was met with stark criticism as the Brexit’s ‘Out’ campaign gained early momentum. The British Pound which closed strongly on Friday following initial reports of a deal failed to capitalize on the gains. On Saturday, David Cameron announced that the UK referendum or ‘Brexit’ would be held on June 23rd. Hours later, London’s mayor and considered a frontrunner with the potential to be the next Prime Minister in the UK endorsed the ‘Out’ campaign.

The British Pound managed to stay flat in early hours of the Asian trading session on Monday but the bearish momentum gained strength as the European markets opened. Falling to a seven-year low against the US Dollar, the British Pound lost over 2.0% in a single day trading before managing to trim some of the gains by the NY trading close, highlighting the volatility of the Brexit uncertainty. Ratings agency Moody’s warned that an exit from the EU membership would risk the UK’s strong credit score, which currently stands at Aa1, investment grade. This follows Fitch which released a report that lengthy negotiations after a veto to exit the EU could hurt investments and businesses in the UK and dampen investor confidence.

[Tweet “Falling to a seven-year low against the US Dollar, the British Pound lost over 2.0% in a single day”]

While it is still too early to speculate on what the outcome of the referendum may be, the price action is seen on Monday merely underscores the importance of uncertainty. Besides the Pound, it is likely that the Euro will feel the heat as well. EURGBP remained choppy although the volatility as a lot less subdued. The Euro was seen trading flat near the 0.78 handle to the Pound, with some big institutions calling for further upside, as much as 0.85 in the coming months.

Questions on handling trade post an exit referendum; including EU migration are just some of the many questions that need answering. Furthermore, an exit from the EU membership could see widespread repercussions especially in countries such as France where Eurosceptic parties have managed to make steady gains. Within the UK a breakup from the EU could also evoke the Scottish Independence movement; led by the SNP which is likely to hold another referendum should the inevitable happen.

Meanwhile, a third of Britain’s biggest companies today warned that an exit from the EU would put the UK’s economy and the job market at risk. The letter was signed by 36 bosses of the FTSE100 companies, less than the expected 80 signatures as some companies backed away citing that they needed to consult their respective boards before endorsing the letter, circulated by Downing Street.

The Bank of England’s inflation report hearings underway saw the Treasury Select Committee question the BoE members on Brexit. BoE Governor Mark Carney, however, underplayed the question noting that the Bank of England will not make any judgments on the outcome of the referendum. The BoE is expected to release the Central Bank’s views on the risks to the UK’s economy arising out of a possible exit from the European Union. The report is slated to be published on March 8^th.