After touching a 2016 high of 1.50 on Thursday, the Pound to US Dollar exchange rate plummeted to a 31-year low of 1.32 at the start of this week’s session.
‘Brexit’ Bets Wane Before Referendum
‘Cable’ drifted higher at the start of last week’s session, rallying by almost four cents as support for the ‘Leave’ camp appeared to soften in the days preceding the EU vote. Analysts said that voters were attempting to distance themselves from the far right following the politically motivated murder of Labour MP Jo Cox, while historical data suggested that undecided Britons were liable to side with the status quo close to referendum day.
GBP/USD edged towards 1.48 on Tuesday in response to a dovish message from Federal Reserve Chairwoman Janet Yellen, suggesting that only one rate hike was expected in 2016 – down from four at the beginning of the year.
Sterling remained strong through the week and rose sharply on Thursday evening after the final ballot papers were handed in. YouGov released survey data suggesting that the ‘Remain’ camp would win by 4% and this pushed the Pound through significant psychological resistance at 1.50 to a 2016 high.
Sterling Capitulates On Vote To Leave EU
However, demand for Sterling was shattered when the results started to come in and it became clear that Britain was headed for an EU exit. The Pound plunged by around 18 cents in its largest ever one-day decline, hitting a 31-year low of 1.32.
Prime Minister David Cameron announced his plan to resign following the results and investors are now faced with the threat of political as well as financial instability. The opposition Labour party is also in crisis with over 15 shadow cabinet members resigning and calling for Jeremy Corbyn to follow suit. Scotland, meanwhile, is considering holding another referendum to remain part of the EU and dark mutterings suggest Northern Island could reunite with the Republic to remain inside the bloc.
Post-‘Brexit’ Sterling
The brutal uncertainty of the UK political and economic climate means that investors are unlikely to pile back into the Pound with vigour anytime soon. The US Dollar is the world’s premier reserve currency and is therefore attracting defensive inflows from all over the world, especially the United Kingdom.
GBP/USD hit a fresh three-decade low earlier today and there is potential for Sterling to slide further as safe haven demand props up the ‘Greenback’ and supreme uncertainty reigns over UK economic sentiment.
However, there is a slight possibility that the Pound could stage a minor recovery if politicians and central bankers can quell market jitters and lay out a roadmap towards stability. Whether this will happen or not remains to be seen.