Uncertainty is one of the most unsettling things for any market. As soon as the EU referendum on EU membership was announced, the British Pound lost value against other currencies.
The short term risk for sterling looks to be if Britain leaves the EU, and this is because of the uncertainty of how Britain will cope being outside the EU. Early this week we had a poll saying that the Remain camp was 15 points ahead, and immediately the Pound improved because there is less uncertainty by remaining in the EU.
When talking about the value of a currency, you can look at a pair, for example the value of the Euro against the British Pound, or you can look at a currency´s value against a basket of currencies. If you follow the Pound, it may fall against the Euro, but improve against the US Dollar or visa versa. I think this is important to remember when discussing the repercussions of the EU referendum vote, as the result of the referendum will have a major impact on the Euro as well as the Pound.
To start with it is easier to discuss what I think will happen if the Remain camp wins. Basically, it is as you were; the Pound will breathe a huge sigh of relief and improve against major currencies. The Euro will also follow on the coat tails of the Pound and will be strong against the same basket, but not as strong as the Pound.
The hard part comes to work out what will happen if the Leave camp win the day, as it is a place the UK has not been for several decades. As already said, the uncertainty of the future will hurt the Pound and some forecasters say that GBPEUR could fall to parity and GBPUSD to 1.2000 in the aftermath of the results, expected early on 24th June 2016.
At Investec, John Wyn-Evans, the head of investment strategy says that
“A Brexit would be distinctly negative for sterling because of its potential to impact the economy and international trade”
I believe that Euro will struggle as well, as there will be talk of other countries leaving the EU, and uncertainty as to how things will look in the future. Any initial fall in the GBPEUR rate may be tempered by future weakness in the Euro, but both currencies will suffer against major currency baskets.
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