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Pound Crashes as the UK Votes to Leave the European Union

By:
Peter Taberner
Published: Jun 24, 2016, 10:23 UTC

The UK pound has fallen to its lowest level for 31 years, after British voters decided to leave the European Union (EU), voting by 51.9% to 48.1% to walk

UK out of the European Union in shock result

The UK pound has fallen to its lowest level for 31 years, after British voters decided to leave the European Union (EU), voting by 51.9% to 48.1% to walk away from Brussels in their ’in or out’ EU referendum, a decision which has led to the resignation of Prime Minister David Cameron.

As the results were announced throughout the night, it was increasingly clear that the Leave campaign were going to emerge victorious, contradicting many polls in the final week before Britain decided, in turn the pound plummeted against the dollar throughout the night.

Sterling reached its nadir just before 6AM this morning, the time when the final result was to be delivered in Manchester, buying $1.32  a fall of more than 10%, the GBP/USD has since moved slightly upwards to $1.37.

Against the euro, there was a similar pattern, as the pound fell to its lowest level throughout the night just before 6AM, buying just over 1.20, a drop of 7%.

The result of the referendum has also had serious repercussions for the euro, as the EUR/USD rate has plunged down to just over $1.09, once again as the result was due to be revealed UK time, the Paris and Frankfurt indexes also faced a drop of 8%.

The UK referendum result has increased the uncertainly across the continent, its remains speculation, buts its feasible that many other member states now might be forced into their own referendums, having the capacity to blast the EU apart.

Bank of England Say They Are Ready Despite Uncertainty

 The Bank of England has acknowledged in a statement that the decision by the British public will lead to a period of uncertainty, warning of market and economic volatility, but they are adamant that they are prepared for the fall out of ‘Brexit’.

The bank’s governor Mark Carney has said that he has been in constant conversation with the Chancellor George Osborne, engaging in contingency plans as events unfolded.

Confidence from the bank stems from the belief that the capital requirements of our largest banks, are now ten times higher than before the 2008 financial crisis.

The Bank of England has stress tested banks against situations that could prove more severe than what  the country currently faces. as a result, UK banks have raised over £130bn of capital, and now have more than £600bn of high quality liquid assets, the central bank asserted.

Robert Bergqvist, Chief Economist and Richard Falkenhäll, senior currency strategist at SEB, a leading Nordic corporate bank, forecast a potential recession for the UK economy and a volatile scenario for the pound.

They opined: “For the British economy, uncertainty about the referendum has created a “wait and see” situation. Downside risks will now increase, while an expected short-term upturn will not occur.”

The UK may now face negative growth in the next few quarters and thus technically experience a recession, Bergvist and Falkenhall forecast that despite a weaker pound, the British central bank will act by cutting its key interest rate, or expanding its bond purchases.

Moreover, it is not unlikely that the Bank of England could intervene in the currency if the GBP continues to depreciate, Bergvist and Falkenhall also added that the UK is suffering from both budget and current account deficits, making it dependent on foreign capital inflows.

 High Turnout For Referendum

 A total of 72.2% eligible voters arrived at a polling booth to make their choice yesterday, the highest in any UK election since 1992, England and Wales both wanted in the majority to leave the UK, claiming 53.4 % and 52.5% of the vote respectively, while Scotland were heavily in favour to remain with 62% of the vote, and Northern Ireland also rejected Brexit with 55.8% saying they wished to stay in the EU.

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