Calm before storm as markets prepare for possible Brexit
LONDON --The British Pound and stock markets started the week with a strong upside correction on Monday following heavy losses over recent weeks, as Brexit fears started to ease and as market participants gear up for one of the biggest event risks in the economic calendar. On June 23 markets will be preparing for the up and coming referendum that day on British membership of the European Union.
The values of stocks, currencies and other financial assets have seen erratic swings in price movement over recent weeks amid uncertainty of the outcome of the up and coming vote.
The Pound had dropped sharply against all of its major counterparts leading up to the referendum as uncertainty builds and with only two days until the result we can expect to see significant volatility build as we head into Thursday.
The Pound Vs. US Dollar exchange rate pushed back towards $1.43 on Friday after testing the all-important 1.40 psychological level on Thursday and €1.27 against the Euro, while the FTSE 100 index closed up 70.61 points at 6021.09 as banking stocks enjoyed a much-needed rebound.
The majority of market participants still believe Britain will vote to remain in the EU regardless of what recent polls suggest and aside from personal opinion, with many suggesting the impact of a Brexit will be considerable on the financial markets and the British Pound. The Pound will almost certainly drop to yearly lows, as will share prices with banking stocks and multinationals expected to be hit the hardest.
It is possible that in order to stem the fall with the Pound, the Bank of England may curb short selling and put Interest rates up in the short term which would mean the cost of mortgages and borrowing would rise. Most major investment banks also predict the Pound could lose up to 15 -20% of its value which would bring the GBP/EUR close to parity. This week the Bank of England will hold additional auctions of Sterling to ensure the baking system has sufficient funds to operate in a potentially chaotic period of market instability.
The departure of Britain, the third largest economy in Europe, the fifth largest in the world, would be a devastating blow to an already stumbling European project. Many EU member states are already in negotiations to secure their own referendums following June 23.
In the Ipsos Mori survey which was conducted in the last month, more than 50 per cent of French and Italian citizens want a vote on the European Union. Of those questioned a third of those asked said they would vote to leave the union if a referendum was held with 48 per cent of Italian respondents saying they would vote to leave.
Pressured by the current migration crisis and the need to accelerate growth and employment, Italian political and economic stability may be hindered by further British opt outs from the EU.
From a political point of view, with 1.1 Italians out of three believing that Italy would be better off without Europe, a Brexit would create a dangerous political situation. Many analysts believe if the UK opts to leave this will cause a domino effect and could be the start of a breakup of the EU altogether, with the Italians possibly looking to follow suit.
The next few days will be particularly volatile for anyone looking to transfer EUR or GBP exposure from property sales or investments from overseas, so it is advised market participants remain cautious and speak to an International Foreign exchange specialist to discuss what options you have to minimise any risk.
To discuss options for your currency exchange requirements and talk through the best rates available, contact Tom Trevorrow on +44-(0)1736 335253 or email firstname.lastname@example.org a call back or for any questions.