The following guest post is courtesy of John Cameron, Currency Analyst and Senior Dealer at TorFX. TorFX is licensed as a money transmitter by HM Revenue & Customs, and is authorised by the Financial Conduct Authority.
As the last voters made their way to polling stations across the UK last Thursday night, futures markets were pricing in a 90% chance that Britain would be remaining in the European Union. All was calm on the currency front, with the Pound US Dollar exchange rate briefly pipping above the 1.5000 level for the first time this year and Sterling Euro trading comfortably above the 1.3000 threshold.
However, within a few hours, it had become clear that the British electorate had delivered one of the greatest economic shocks in modern history and the value of Pound Sterling dropped precipitously.
Legendary currency trader George Soros had warned earlier in the week that in the event of a vote for Brexit, the next day would become known as ‘Black Friday’, with the Pound giving up ‘at least 15% of its value’. Few investors had believed that this scenario would come to pass, but as dawn broke on 24th June the prospect of a run against Sterling was becoming a reality. The Pound Euro exchange rate had plunged into the 1.2200s by 0500hrs on Friday 24th, while the Pound Dollar exchange rate had shed a full 16c from the night before and was changing hands in the 1.3400s.
The Scottish National Party were quick to attempt to use the fact that Scottish voters had decided by a large margin to ‘Remain’ in the EU as a springboard for a break from the United Kingdom, adding to the Sterling selling pressure. Meanwhile, reports that HSBC was set to relocate 1,000 employees from London to Paris and forecasts that up to 70,000 UK banking jobs could be lost added to the mood of panic.
The Pound continued tracking lower against the single currency for the next two sessions, eventually dropping into the 1.1900s against the Euro as the European equities session came to a close on the Monday following the vote, while the Pound Dollar exchange rate struck a fresh 31-year low at the same time. The 48hrs which followed saw the Pound claw back 2c against the Euro and a similar amount against the US Dollar. Whether this move represents a ‘dead cat bounce’ before the Pound heads lower once more remains to be seen.
Many analysts predict that the real test for Sterling is still to come. The provisional Q2 Gross Domestic Product results for the UK economy are due for publication next month and they will provide an indication of the extent to which British economic participants postponed investment decisions in the lead-up to the referendum. A poor showing from the GDP number would then leave investors eyeballing the monthly UK employment numbers, retail sales figures and services sector surveys for hints that the domestic economy is sliding toward recession. Affirmative evidence that British economic activity was contracting would heap further pressure on Sterling, with nothing in the way of recent technical support stopping the Pound US Dollar exchange rate trading down into the 1.2000s.
In such a circumstance, the Pound Euro exchange rate could potentially make a run at its record low of just below 1.0200 which it touched off at the end of 2008. One factor limiting the losses for the Pound against the shared currency is the nagging fear that Brexit could trigger similar referendums in other EU states. The prospect of a large Eurozone economy leaving the Euro region may dampen support for the single currency moving forward.