Pound Falls Most in One Month as Johnson Backs ‘Brexit’ Campaign

brexitA British Union flag, commonly known as a Union Jack, right, flies next to a European Union (EU) flag, in London, U.K., on Wednesday, Feb. 17, 2016. Photographer: Chris Ratcliffe/Bloomberg via Getty Images

The pound fell the most in over a month against the dollar after London Mayor Boris Johnson, one of the U.K.’s best-known and most popular politicians, said he’ll campaign for Britain to leave the European Union in a June referendum.

The drop undid a gain made late Friday, when David Cameron secured a deal on membership terms with EU leaders. The U.K. Prime Minister said the following day that he would fight to keep Britain in the bloc, and set a June 23 date for the vote. Morgan Stanley analysts wrote on Friday that Johnson’s decision would be key for sterling, given his popularity with the British public.

“The pound should come under immediate pressure,” if he opted to campaign to leave, analysts led by Hans Redeker wrote in an e-mailed report.

The pound fell 1 percent to $1.4258 as of 9:11 a.m. in Auckland on Monday, the most on a closing basis since Jan. 15. It climbed 0.5 percent Friday. While the currency is down 3.2 percent this year, it has rebounded from an almost seven-year low of $1.4080 reached in January.

Even after Cameron announced a deal winning welfare curbs on Friday, a measure of traders’ expectations for price swings in the pound against the euro during the next six months remained at the highest since 2011. Although the announcement of the date removes one aspect of ambiguity for traders, they now face months of polls and campaigning that could boost volatility further.

With traders already pushing back bets on the timing of a Bank of England interest-rate increase, the prospect of Britain leaving the world’s largest single market had been causing further concern, helping push down the pound against most of its Group-of-10 peers this year.

“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,” said David Page, a senior economist at AXA Investment Managers in London. “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.”

Goldman Sachs Group Inc. said earlier this month that if Britain quits the EU sterlingcould fall to $1.15-$1.20 — levels last since in 1985. HSBC Holdings Plc said in January that a forecast for a jump to $1.60 by year-end relied on the nation remaining in the 28-member club.

Higher Volatility

Six-month implied volatility on the pound against the euro, a measure of price swings based on options, was at 12.10 percent on Friday, the highest level since September 2011, based on closing prices.

“The uncertainty will persist” into the vote, said Kit Juckes, a global strategist at Societe Generale SA in London. “Sterling was the weakest major last week and probably remains under pressure.”

The uncertainty over the vote hasn’t had the same impact on equities. While U.K. stock swings have increased this year, FTSE 100 Index implied volatility remains lower than for the euro area. And the weakening of the pound has actually helped the gaugeperform better than any other major market in the region. Even small- and mid-cap companies, deemed more at risk in a “Brexit” scenario, have fallen less than their European peers. Pictet Asset Management says U.K. stocks are not reflecting the true danger of an exit.

Ministers’ Stance

After the announcement of a date, attention quickly turned to the stance of ministers who, while given a free hand by Cameron to campaign against the government’s position, were asked not to announce their intentions until after the cabinet meeting on Saturday.

Johnson isn’t the only dissenter. Six ministers said they’d defy Cameron and campaign to leave on Saturday, among them the Prime Minister’s long-time friend and ally, Justice Secretary Michael Gove.

Even so, Cameron has convinced the majority of his cabinet to support him, including Business Secretary Sajid Javid and Home Secretary Theresa May, who were both seen as wavering over which way to vote.

Bloomberg

About the Author

Samed Olukoya
Samed Olukoya is the CEO/Founder of investorsking.com, a digital business media, with over 10 years' experience as a foreign exchange research analyst and trader. A graduate of University of East London, U.K. and a vivid financial markets analyst.

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