​British Pound Falls Amid ‘Brexit’ Fears As June National Referendum Announced

British Pound Falls
Author: Jennifer HongBy:
Staff Reporter
Feb. 23, 2016

The British pound falls about 2 percent amid fears of Britain leaving the European Union. London’s mayor Boris Johnson announced his support for exiting the EU while announcing his backing of what is known as the “Brexit,” to be determined in a June 23 national referendum, according to the Wall Street Journal.

The pound fell on Monday following Boris’ announcement on Sunday. The move is a setback for British Prime Minister David Cameron, whose negotiations in Brussels last week secured a deal, pending the referendum, to reset Britain’s relationship with the EU. Like Cameron, the popular Johnson is a Conservative Party member and is regarded as Cameron’s potential successor.

British pound falls amid news of Brexit

British pound falls amid news of Brexit

At one point Monday, the pound traded at $1.41020, a 2.1 percent decline and the largest one-day drop since 2009. It fell 1.1 percent against the Euro. The Australian dollar jumped to a nine-month high of 51.1 pence on the news, as investors sold out of the pence sending it to its lowest point in seven years.

The British pound fell 17 percent against the U.S. dollar in the past 18 months. Several Conservative Party ministers have indicated they will support a move to separate Britain from the EU.

“There’s still no guarantee that the UK will exit the European Union, but I think what it has done is it has highlighted the uncertainty not only here in the UK about the future of the EU, because the euro has also taken a bit of a hit, but also in the global economy as a whole,” Chief market analyst at CMC Markets in the UK, Michael Hewson, said.

“A Brexit would be bad for sterling, but it would also be bad for the euro,” said Neil Jones, Mizuho’s head of hedge fund sales in London.

Monday’s fall in the pound may also reflect disappointment that Cameron didn’t manage to secure a better deal for the UK in his EU negotiations, analysts said. Leaving the UK would likely hit sterling on several fronts, said David Page, a senior economist at AXA Investment Managers.

That would include significantly lower economic growth for the UK, capital flight, less foreign direct investment and the Bank of England keeping its easy-money policies in place for longer. “Whenever you have political uncertainty, it tends to be the currency that takes the most impact,” he said.

Recent opinion polls generally put those campaigning to preserve the UK’s EU membership in the lead, but the gap has narrowed in a number of surveys. Most investors say the UK is likely to remain in the EU, but acknowledge that nervousness over the vote will weigh on markets in coming months.

Referendum Announcement

Traders have been ramping up bets against the British pound ahead of the referendum announcement. The pound is off 4.3 per cent against the dollar this year and 5.8 per cent against the euro.

Prior to the British pound falling, the cost of buying options contracts to protect against a big move in the currency this summer hit its most extreme level by one measure, since Europe’s sovereign debt crisis. Meanwhile, the relative cost of buying protection against a falling pound, as opposed to the currency rising, hit its highest level since the global financial crisis of 2008.

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