Volatile Week Ends with British Pound Down Nearly 5 Percent

The British Pound fell more than 10 percent against the U.S. Dollar from its high at 1.5016 on June 24 to its low at 1.3223 on June 25 after Britain surprised markets by voting to leave the European Union. UK voters backed Brexit by 52% to 48% on a turnout just above 3-in-4. The GBP/USD closed the week at 1.3649, down 0.0703 or -4.90% after reaching its lowest level since 1985.

The price action suggests that investors initially mispriced risk and are now repricing risk with heightened uncertainty. The most important factor is the markets are operating smoothly and there isn’t a liquidity crisis. Trading conditions would have been worse if the markets had locked up because of liquidity issues.

One thing that investors should be aware of: There will be no more EU negotiations after Brexit. Jean-Claude Juncker, European Commission President, has told reporters in Brussels “out is out”. He said David Cameron had secured the “maximum” Brussels could give, adding there will be no further renegotiation. He said “British voters have to know there will be no kind of any negotiation. We have concluded a deal with the prime minister. “He got the maximum he could receive, and we gave the maximum we could give, so there will be no kind of renegotiation.”

That being said, there are some Brits who believe there should be another referendum in the near future. Some believe that the UK has more leverage now and it could negotiate a better deal with the EU. This could add to the volatility by producing a two-sided trade over the near-term.

The three presidents of the European Council, Commission and Parliament, plus the Union’s current president, on Friday called for the UK to trigger Article 50 of the Lisbon Treaty and formally announce its withdrawal “as soon as possible, however painful that process may be [with] no renegotiation [rather than] unnecessarily prolong uncertainty.”

Thursday’s Brexit vote also led to the resignation of UK Prime Minister David Cameron, plus calls for another referendum on Scottish independence, as well as a vote of no confidence in UK opposition party Labour’s leader Jeremy Corbyn, who also backed Remain.

The Euro finished mixed last week. It gained against the British Pound with the EUR/GBP closing at .8106, up 0.0258 or +3.29%. The main concern for the Euro Zone is whether the UK’s exit from the EU will eventually lead to a recession. Flight-to-safety buying drove investors into the U.S. Dollar and the Japanese Yen, putting pressure on the Euro. The EUR/USD fell sharply to finish at 1.1097, down 0.0174 or -1.55%. The EUR/JPY closed at 113.466, down 3.907 or -3.33%.

Investors reacted to the steep drop in the British Pound and global equity markets by moving funds into the lower-yielding Japanese Yen. The USD/JPY plunged to a multi-year low at 98.887 before snapping back to close at 102.143, down 1.1961 or -1.88%.

Money also flowed into the Swiss Franc, driving it sharply higher before the Swiss National Bank intervened in the currency market to try to suppress the Franc by selling it.