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Sterling Sinks to Seven Year Low as Britain Contemplates Her Future

Posted by Joseph Trevisani on Feb 22, 2016 2:36:57 PM

Will Britain leave the European Union?

At the moment it seems improbable.  Prime Minister David Cameron and most of the business establish will campaign for continued membership and such a drastic solution is rarely adopted by a polity not in crisis.

But with Boris Johnson, the Conservative Mayor of London, the exit camp gained a powerful and supremely articulate supporter.

 Mr. Johnson’s announcement that he will campaign for British exit from the European Union sent the pound sterling into a tailspin. It dropped as low as 1.4058 against the U.S dollar, 2.4 percent beneath Friday’s close, a level not seen since the depth of the financial crisis in the early part of 2009. 

Prime Minister James Cameron’s agreement with the European Union on terms to keep the UK within the EU on Friday had given the sterling a modest half a percent boost to close at 1.4406.  

Sterling slipped as low 0.7843 against the euro on Monday, 1.5 percent lower than last week’s close. The euro was off 1 percent versus the dollar at 1.1015 from Friday’s close (12:45 pm in New York). 

Although the announcement of the date of the referendum will eliminate one small uncertainty, markets now face months of polls and campaigning as the June 23rd referendum dominates political and popular discussion in the UK.

Volatility in the currency markets is sure to rise as a perceived disunion in Europe would have profound implications for world trade and growth in a global economic atmosphere already rife with uncertainty.  A successful departure would also be a disaster for the European Union and its goal of continental integration

The fortunes of the pound sterling and the euro are now tied to the outcome of the UK choice.

Traders had already begun to discount the prospect of a rate increase from the Bank of England once seen highly likely, but the pending vote has all but eliminated any chance of a change of policy from the Bank of England in the interim.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

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