Risk appetite was surprisingly strong in the final days ahead of the UK’s EU referendum, with the opinion polls appearing to point towards a ‘Remain’ campaign win. This saw investors piling into the Pound during the early week, with the odds of a Brexit having been seen to decline amongst investors and bookies alike. Markets were also reassured by the fact that the Bank of England’s (BoE) second additional liquidity auction saw a particularly low take-up, the lowest since January 2015, which implied further confidence within the financial sector. As a result the GBP/USD exchange rate entered a strong bullish run, making steady gains in the final run-up to the vote.
Fed Dovishness Weighed on US Dollar Demand
Commentary from Fed Chair Janet Yellen did not offer much encouragement to the US Dollar, meanwhile, as the policymaker reiterated the need for monetary tightening to take a gradual course. This was ultimately not nearly as dovish as recent remarks from St Louis Federal Reserve President James Bullard, who had suggested that a rate hike might not be appropriate until 2018. However, the fact that Yellen took a step back from the more hawkish tone of previous comments ahead of the June policy meeting seemed to dent the likelihood of an imminent rate hike.
Subsequently, despite resurgent market jitters seen once the polls opened on Thursday, the GBP/USD exchange rate continued to make solid gains. Recent economic data from the US proved generally discouraging, with the manufacturing and housing sectors in particular showing fresh signs of slowness. With investor confidence still relatively high in the outcome of the EU referendum at the time this saw the Pound climb to a yearly best of 1.50 against the US Dollar.
GBP/USD Struggled to Recover Ground amid Brexit Chaos
However, this optimism ultimately proved short-lived, as the ‘Leave’ campaign surged to an unexpected victory early on Friday morning. Naturally, as markets had effectively priced in a vote to remain, this triggered a severe slump in demand for the Pound. With markets scrambling to adjust to this unexpected outcome the GBP/USD exchange rate temporarily plunged to a thirty-one year low of 1.33, before recovering somewhat as the initial shock of the result began to fade.
Words from Bank of England (BoE) Governor Mark Carney helped to calm investor nerves somewhat, as the policymaker reaffirmed the BoE’s commitment to ensuring economic stability. While Carney pledged an extra 250 billion Pounds of additional liquidity to the financial sector in the wake of the result markets were reassured that there were no further emergency measures announced at this juncture.
Even so, with Prime Minister David Cameron having resigned in the wake of the ‘Leave’ vote victory uncertainty continued to weigh on the Pound ahead of the weekend. In the hours and days after the vote speculation over the future of the UK’s relationship with the EU is expected to keep markets in a jittery mood, especially with calls for independence referendums from both Scotland and Northern Ireland. As a result the GBP/USD exchange rate is predicted to remain on a bearish trend for the foreseeable future, with investors lacking any great incentive to buy into the softened Pound amidst the current atmosphere of worry.
Domestic data is likely to take a backseat to Brexit-based volatility in the coming days, with increased safe-haven appetite likely to keep the ‘Greenback’ on a dominant footing. While the resultant negative headwinds in the global economy could deter the Fed from raising interest rates before the end of the year this is not expected to be enough to drive the US Dollar lower in the near future.