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Brexit and its Treatment Hammers Sterling

Posted by Joseph Trevisani on Jun 30, 2016 5:11:03 PM

The historic collapse of the British Pound after the passage of the UK referendum to leave the European Union lopped 19 figures from the sterling's U.S. Dollar value.

Since the 1.3121 bottom on Monday, 13 percent below the pre-vote top, the pound had made a modest 3 percent recovery to yesterday’s high at 1.3534, closing at 1.3429.

Today the Bank of England’s solution to the potential economic problems posed by Brexit had an identical, if muted effect, to the vote itself.

Governor Mark Carney's promise that he won’t hesitate to act to protect the economy and that that it was likely "some monetary easing' would be required in response to the Brexit vote, sent the pound reeling back towards its Monday low.  

Mr. Carney's remarks came in a speech to UK business leaders his second after the UK referendum last Thursday. 

The bank's official base rate has been at 0.5 percent for seven years and has not been changed since it was cut in half from 1.0 percent in March 2009 at the end of a six month descent from 5.0 percent and a peak of 5.75 percent in the second half of 2007.

"In my view, and I am not pre-judging the views of the other independent Monetary Policy Committee (MPC) members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,"  stated Mr. Carney.  The MPC meets next on July 14th and then on August 4th.

The bank’s Asset Purchase Facility has been at 375 billion pounds since July 2012.

Bank economists had already been expecting that UK economic growth would slow next year to 1.6 percent from this year’s forecast 2.3 percent. But both of those predictions were made before the UK electorate voted to rescind its EU membership.

That vote last Thursday came as a profound shock to the markets and much of the public and the media. The majority of the polls just before the elections had indicated that the referendum would fail. 

The FTSE 100 gained 144.27 points on Thursday, 2.27 percent to close at 6504.33.  On June 23rd the day of the referendum vote the FTSE Index, expecting a rejection, had closed at 6338.10.

Today’s finish is 2.6 percent above the pre-vote level and back to where it was last August. 

Since the vote UK Gilt yields have fallen sharply.

The return on the 10 year generic bond closed on Thursday at 0.870 percent a record low.  On June 23rd it had ended at 1.373 percent.  The 2 year closed at 0.099 percent today, its weakest in three and one half years. The record low yield came on August 2, 2012 at 0.330 percent. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

 

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