The British pound tumbled by 1.65% against the dollar Monday, marking its worst daily performance since 2011. This came after London Mayor Boris Johnson announced that he will campaign in favor of Britain exiting from the European Union (EU) – known as Brexit – in the June referendum. However, the pound still remains above its 7-year low of $1.4080.
The British pound reversed its gains from Friday, when Prime Minister David Cameron secured a deal with EU members in Brussels that he would continue to pursue the agenda of Britain remaining a part of the EU bloc and set a referendum date of June 23, 2016. (See also: Brexit Uncertainties Dominate EU Summit.)
Valentin Marinov, head of the Group-of-10 currency strategist at Credit Agricole SA’s corporate and investment-banking unit in London, said, “The pound is tumbling after the deal clinched by Prime Minister Cameron at the EU summit failed to alleviate fears about Brexit.” Valentin added, “The fact that prominent members of the Conservative Party announced they will campaign for Britain to leave the EU likely underscored investors’ concerns that Brexit risks could increase from here despite the deal.”
Will Pound Volatility Continue?
The British pound has witnessed high volatility in the past few months on the possibility of a Brexit. Although Cameron’s agreement with the EU bloc has allayed these fears somewhat, analysts still believe that the announcement of a referendum in June will feed uncertainty in the near future as the country now faces months of polls and campaigning.
David Page, a senior economist at AXA Investment Managers in London, said, “The pound’s weakness is a product of uncertainty of the U.K.’s ongoing membership of the union, not the timing of the poll.” He added, “Weakness is likely to reflect any increased perception of the likelihood to leave and as such is likely to be a constant feature over the coming months.” (See also: Will the UK Leave the EU?)
What happens if ‘Brexit’ happens?
Many analysts believe that a ‘Brexit’ will be negative for Britain’s growth prospects and its currency. According to Goldman Sachs, the British pound could fall further to below $1.20 – a level not seen in 31 years. Moody’s Investors Services has already said if Brexit happens, then the country’s credit rating could downgrade, as the economic costs of the decision are more than the economic benefits.
The Bottom Line
Whether or not Britain leaves the EU bloc is still uncertain. While many politicians are against Brexit, including Prime Minister David Cameron, there are others such as Boris Johnson and Justice Secretary Michael Gove who favor it. The uncertainty of this decision will most likely result in high volatility in the British pound.
Kengo Suzuki, chief currency strategist at Mizuho Securities Co. in Tokyo, said, “Even if an exit isn’t likely, uncertainty and concerns about it will continue and weigh on sterling.” Kengo added, “On the economic front, there isn’t much to undermine the currency, but the uncertainty over a potential exit will cap sterling, keeping it in a $1.40 to $1.50 range.”