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Silent War Raging Between The Euro & Sterling

By:
Barry Norman
Updated: Jun 28, 2016, 06:50 UTC

The pound was on track Monday for more losses as the Brexit uncertainties continued to weigh on the UK's currency. The GBP/USD traded 3.66% lower at

Brexit Effect Continues

The pound was on track Monday for more losses as the Brexit uncertainties continued to weigh on the UK’s currency. The GBP/USD traded 3.66% lower at $1.3159 Monday, dropping to the lowest level since September 1985. The pound fell below Friday’s low created amid panic trading stemming from the success of the ‘Leave’ camp in the referendum on EU membership. Against the euro the pound is trading at 0.8353 up by 228 points. The pound took a hit of 502 points in Monday’s session.
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Markets and betting agencies predicted the ‘Remain’ campaign would win and investors were caught off guard after Britons chose to leave the union. Stock indices plummeted in the EU, UK and US, while the pound dropped to 31-year lows.

Major stock indices in the US declined during Monday’s trading session, due to continued fears after the Brexit referendum and uncertainty about the future performance of markets worldwide. The Standard & Poor’s 500 index decreased 1.79% to 2,001.00 points.

Among other indices, the Dow Jones Industrial Average was traded 1.51% lower at 17,138.67 points, while the Nasdaq index sank 2.03% to trade at 4,612.45 points.

The markets were calmer in the morning after George Osborne’s speech. He gave few specific details, but created a sense of continuity and organization after David Cameron, as well as many members of the shadow cabinet, resigned.

Osborne also said that Article 50 will be triggered only when a new PM is appointed, which should be in October, so that the PM can lead the renegotiations. However, the calm mood failed to last and sterling returned to plummeting.

The German Chancellor, Angela Merkel, has said there can be no talks on Brexit before the UK formally begins the process of leaving the EU.                             While accepting the UK needed time, she added it should not be a “long time”.

Merkel is due to meet French and Italian leaders later in Berlin, with the speed of negotiations for the UK’s exit high on the agenda.

The UK will probably enter a “mild recession” by 2017 because of its vote to leave the European Union, according to Goldman Sachs’ economists. Goldman Sachs downgraded their global growth forecast by 0.1% to 3.1% in 2016 after the UK chose Brexit in the EU membership referendum.

“Already the battle lines are being drawn, with EU leaders urging the UK to get on with triggering Article 50 of the Lisbon Treaty. With UK politics now gridlocked it would appear that any triggering of Article 50 could well take time, if it happens at all. Today we look set to hear the first comments from Prime Minister David Cameron since his resignation speech on Friday as he addresses MPs after a weekend of political turmoil,” Michael Hewson, chief market analyst at CMC Markets UK said in a note on Monday.

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US Dollar strength versus Euro

“This bleeds through the EU narrative in terms of its unity and its popularity,” said Peter Kenny, senior market analyst for Wall Street firm Global Markets Advisory Group. Kenny said the unease in the markets would likely keep the Federal Reserve from raising rates in the short term, and in the long term the consequences would be far-reaching.

“Effectively what that means is that the Fed is not going to be in the position to normalize rates at the extent they were telegraphing only a week and a half ago,” said Kenny. “They can raise rates once at the most by the end of the year. The euro fell to trade at 1.1012 down 105 points while the US dollar gained mover than 100 points to reach 96.66.

Analysts are afraid that the dollar strength might exacerbate the transmission of slow US economic growth to other parts of the world raising the likelihood of another world recession.

Although the Federal Reserve is mandated by Congress to base its monetary policy only on the state of the employment market in the United States and United States inflation, over the past year and one-half the Fed has had to take into account, more and more, what was happening in other nations and in other markets. Already Fed officials have been talking continuously with their counterparts in other central banks around the world according to an article published by James Mason.

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