Worsening post-Brexit outlook sends Pound to new multi-year lows

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6 July 2016

Written by
Matthew Ryan

Senior Market Analyst at Ebury. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Sterling slumped against both the US Dollar and the Euro on Tuesday as investors once again began fretting about the economic and financial fallout of Britain’s vote to leave the European Union.

T
he UK currency plunged over 1% against the US Dollar, falling to its lowest level since September 1985 after the Governor of the Bank of England Mark Carney, as expected, painted a fairly bleak picture of the UK’s post-Brexit outlook at yesterday’s Financial Stability review.

In the latest, and undoubtedly not the last, attempt to prevent an economic slowdown from taking hold, the BoE announced it would be lowering its capital requirements for Britain’s banks, effective immediately. This will potentially free up an extra £150 billion in lending and should alleviate some pressure from a fall in investor demand for British assets.

Meanwhile the Euro also fell sharply against the US Dollar on Tuesday afternoon with the markets now becoming increasing concerned about the risk of contagion in the Eurozone. Hungary became the latest country to call for a controversial referendum on its EU migrant quota system yesterday.

The state of the Italian banking system has also piled pressure on the already fragile Euro-area and its currency. A feature in the Wall Street Journal yesterday revealed that almost a fifth of Italian banks are loaded with ‘sour’ debt, over three times that of the US during the financial crisis.

We now look to this evening’s FOMC minutes at 19:00 UK time. We see little reason for the Fed to take a hawkish tone, given recent dovish rhetoric from Chair Janet Yellen and of course the significant downside risk presented by last month’s Brexit. Given the Fed’s June meeting took place prior to the Brexit vote, tonight’s minutes could be lower key than usual.

President of the European Central Bank Mario Draghi will also be speaking at a conference in Frankfurt this morning.

Major currencies in detail:

GBP

Sterling tanked 1.2% yesterday, falling to its weakest position in 31 years against the US Dollar after Mark Carney claimed that Brexit risks were ‘beginning to crystallise’.

Of course, not all the ramifications post-Brexit are doom and gloom for the UK economy. Carney acknowledged that a weaker Pound was good news for Britain’s exporters and the country’s lofty current account deficit, which ballooned to a record high last year.

Concerns regarding the stress on Britain’s financial system have amplified after three of the UK’s largest property funds suspended trading in the past few days following increases in the number of investor redemptions since the referendum.

With no major economic announcement in the UK today Sterling could take a breather, barring any negative political developments.

EUR

Growing political and economic concerns in the Eurozone sent the Euro 0.5% lower against the US Dollar yesterday.

There was mostly second-tier data on Tuesday, which very much took a backseat to concerns over the health of the Eurozone banking system, particularly in Italy. The latest services PMI rose more than expected to 53.1 from 52.8, while retail sales were in line with expectations at 1.6% YoY.

Mario Draghi’s speech this morning will be the highlight in the Eurozone today. Investors will also be hoping the ECB’s meeting accounts on Thursday could provide some clues as to the timing of additional economic stimulus, if any.

USD

The US Dollar index rose 0.5%, with the Dollar trading higher against every major currency barring the Yen on Tuesday.

It is likely that the Fed will be increasingly concerned about the strength of the US Dollar and, in particular, its effect on the US manufacturing sector. Factory orders turned negative in May, falling 1%, while durable goods orders for the same month were revised downwards to -2.3%.

However, the US Dollar continues to gain from increasing risk aversion in the currency markets, particularly given the growing risk of contagion in the Eurozone. 1.10 now looks like the main support level to watch for EUR/USD.

The Fed will be the focus in the US today. In the meantime, the latest US services PMI from Markit could prove a market mover when released at 14:45 UK time.

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