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June 2016

Post Brexit - Huge uncertainty causes massive confidence drop

Published: Monday 27 June 2016

The vote to leave the EU is still not sinking in with some voters. Even members of the EU are so shocked that a country would want to leave that their response has been a mixture of anger and derision. Nonetheless, leave was the decision and the repercussions will rumble on for a long time to come.
A drop in the value of the Pound was inevitable; investors hate uncertainty. Although if anyone can find certainty anywhere in the financial markets right now, I would live to see it. That uncertainty over the UK and its plans for the future outside the EU will not even begin to be resolved until a new Prime Minister is found and Article 50 is instigated, commencing the EU exit negotiations.
Logically, the 2 year negotiation period ought to end on 1st January 2019, to tie in with the EU's financial year. That gives us 30 months of almost guaranteed uncertainty and the Pound will reflect that. Whether Bank of England interest rates or market intervention will be necessary is unknowable at this stage but one factor that appears to have been forgotten is that the UK's exit is very bad news indeed for the EU.
The Euro, which has been surprisingly stable in comparison with the Pound, is likely to weaken as well in the months ahead. A number of EU nations are pressing for their own referenda and some of the Euro-sceptic parties who tend to be to the right of the political spectrum, will undoubtedly seize this opportunity and could do rather well in forthcoming elections.  Those elections include Germany where Angela Merkel is under pressure after her 'open door' speech to migrants. It has angered many Germans who may be seeking revenge. If a different kind of Grexit (one involving Germany) were mooted, who knows what may happen to the Euro. I suspect it wouldn't be good. 

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