British Pound Plummets over Fears of British Exit from the European Union
LONDON – The British pound suffered its biggest drop in more than six years on Monday, as fears that the U.K. will leave the European Union intensified after London Mayor Boris Johnson came out in favor of a “Brexit”.
Sterling GBPUSD, -2.2839% plunged to $1.4094, down 2.2% from its late Friday level of $1.4405 in New York. The slump is the biggest loss for the pound against the dollar since 2009, easily dwarfing the moves seen in the run-up to the Scottish independence referendum.
Monday’s fall reverses a gain for the pound made late Friday, when U.K. Prime Minister David Cameron struck a deal with the European Union to change his country’s relationship with the bloc. The deal came after days of difficult negotiations with other EU leaders in Brussels, capping months of intensive lobbying and uncertainty over whether an agreement could be reached this winter.
On Saturday, Cameron pledged to fight to keep the U.K. in the political union and set June 23 as the day of the ballot. But by Sunday he was already meeting resistance within his own Conservative Party, as prominent politician Johnson said he was backing the campaign to leave the EU.
“The political posturing has now begun in earnest, and despite U.K. Prime Minister Cameron finalizing his deal with the EU, the affable London Mayor Boris Johnson joining the ‘Vote Leave’ camp has raised the possibility of a Brexit, something that is already negatively impacting on Sterling,” said Richard Perry, market analyst at Hantec Markets, in a note.
“The vote is four months away on 23 June, but this shows that any time questions of a Brexit arise, the volatility in sterling is likely to remain elevated,” he said.
Recent history shows how U.K. ballots can rattle investors’ nerves, when it comes to the pound.
Ahead of the U.K. general election in May, sterling made wild swings as traders braced for a hung parliament and coalition negotiations, as the result was seen as the most unpredictable in generations. As it turned out, the Conservative Party won an outright majority, sending the pound sharply higher immediately after the vote.
The same kind of volatility was seen with the Scottish independence referendum in September 2014, with investors unsure what a break-up of the U.K. would mean for financial markets.
“When it comes to certainty, the status quo is always seen as the safer option, in the ‘better the devil you know’ way,” said Brenda Kelly, head analyst at London Capital Group, in a note.
“Market moves will be at the mercy of the various Brexit polls for the coming months and despite the fact that we should have learned by now that they’re fairly useless, the markets won’t necessarily adopt that logic,” she added.
Analysts and business leaders are concerned that a departure from the EU would slow the U.K.’s economic growth, given it would sever commercial ties with its largest trading partner. There are also fears London could lose its position as the European capital of finance, with business shifting to hubs such as Frankfurt and Paris instead.
Goldman Sachs forecast earlier this month the pound could crash as much as 20% in the case of a Brexit because of the weaker economic outlook and potential hit to investments.
Sterling has already shed a lot of its strength against the euro and dollar this year as investors prepared for the EU negotiations. Against the dollar, the pound is down 4.5% in 2016, and down 5.8% against the euro GBPEUR, -1.2367% according to FactSet data.
Much of the pound’s weakness has been attributed to uncertainty over which way the British public will jump when it comes to the in/out referendum and, as part of that, whether Cameron would get reforms from the EU strong enough to avert an “out” result.
In the May 2015 U.K. general election, Cameron promised U.K. voters he’d fight for better membership terms with the EU and said a referendum would be held no later than the end of 2017.
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