Brexit Jitters Pull Down Pound Sterling to a Two-month Low

Sterling pound is 2016’s worst-performing Group-of-10 currency

The pound tumbled to a two-month low on Monday, June 13th, 2016, while the yen strengthened over jitters about a potential British exit from the European Union. Investors harbored bearish sentiments for the pound, driving the demand for safe assets for the first time in seven weeks. Economists have ruled out the possibility that the Federal Reserve will raise interest rates on June 15th, 2016, a day before the Bank of Japan also decides on critical policy matters, according to Bloomberg. The pound weakened for the fourth consecutive day after the weekend polls showed that the British citizens were still undecided whether they will opt to leave the EU before the June 23rd, 2016, referendum.

With less than 10 days to go before the U.K. decides on whether or not to remain within the EU, the pound has taken a battering, sliding to its lowest level since April 2016. A gauge of one-month volatility, which takes into consideration the aftermath of the vote, climbed for the sixth successive week, indicating that traders are bracing themselves for more turmoil after the referendum.

Source: Bloomberg
Source: Bloomberg

The Sterling slumped to a level of $1.4159, the weakest since April 18th, 2016, and was 0.5% lower at $1.4184 as of Monday, June 13th, 2016, extending a three-day, 2% tumble. On the same day, it dropped 0.5% to 79.29 pence per euro. On the other hand, the yen advanced 0.7% to 106.20 per dollar, strengthening against all 16 of its major peers. Analysts believe that regardless of the outcome of the Brexit debate, there will likely be a sharp movement in rates followed by a period where markets would find their new normal.

The pound dropped as much as 1.1% on June 6th, 2016, after polls suggested that majority of voters support leaving the 28-nation bloc. It climbed as much as 1.5% on June 7th, 2016, after polls suggested more voters supported Britain remaining within the EU.

Brexit risk delays policy changes

The Brexit debate is prompting major central banks to delay their policy changes until after the June 23rd, 2016, vote. The Federal Reserve is rethinking on interest rate hikes to avoid tightening prematurely, while the European Central Bank is considering keeping stimulus available should it be needed at a later date.  Fed Chairperson, Janet Yellen, has warned that Brexit would have “significant economic repercussions”. Her counterparts including Raghuram Rajan, Governor of the Reserve Bank of India, has also echoed her thoughts, signaling that the world is waiting and watching.

Pound – worst performer among group-of-10 currencies

The pound has been the worst performer among the basket of 10 currencies. It slid to a seven-year low of $1.3836 in February 2016 and has witnessed volatility through the referendum debate process, echoing the sentiments of the British citizens. A measure of three-month pound-dollar volatility climbed to 15.82%, peaking at 16.40% in April 2016, the highest since 2010.

It is expected that after next week’s referendum on EU membership, the pound will either sink to the lowest level in more than three decades or climb toward the highest this year, according to Bloomberg. While analysts see a drop below $1.35 if Britain decides to leave the EU, the pound is expected to jump to as high as $1.50 following a victory for status quo.

So far in 2016, the pound has already shed 3.8% against the greenback as investors assess the risks of U.K. exiting from the EU. It reached a seven-year low of $1.3836 in February 2016 after Prime Minister David Cameron announced the date of the vote, and has since remained volatile.

Pound’s loss is yen’s gain

The yen climbed the most in a week against the dollar as economists predict that the Bank of Japan will ease monetary policy at its meeting on June 15-16th, 2016. If there is a high chance that the U.K. will vote to leave, then the yen is expected to strengthen against a basket of major currencies owing to a huge demand for safe haven assets.

Positions that benefit from losses in the pound exceeded those that benefit from gains by 66,299 contracts in the week ended June 7th, 2016. On the other hand, bullish bets on the yen increased by 28,016 to 42,853 contracts, according to the Commodity Futures Trading Commission as of Friday, June 10th, 2016.

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