Excerpt from



  • UK votes for Brexit. PM Cameron resigns
  • GBP/USD falls 18 figures to its lowest level since 1985 before recovering
  • Global equity markets slump. Eurostoxx falls more than 10% – hits lowest level since 2013

What has happened?
The UK referendum decision to leave the EU had a huge impact on markets overnight, in part because markets were almost fully pricing in a vote to “Remain”.

GBP fell very sharply, with the JPY and the USD the main beneficiaries. Initially GBP/USD fell to 1.3240 from a high above 1.50 on Thursday, hitting its lowest level since 1985. It recovered some of those losses in the European morning, nearly reaching  1.40, before falling back again.Graph attached here for GBP/USD.

While the moves on the day have been huge, and volatility has also been extreme, it is worth noting that GBP/USD was as low as 1.38 in February before recovering in recent months as expectations of Fed tightening faded and the USD generally weakened. GBP was also generally very firm in recent days as expectations built of a vote to “Remain”.

GBP has not been the only currency to suffer. The EUR has also weakened sharply against the USD reflecting uncertainty about the outlook for the economy, with many seeing a UK exit as negative for the EU in general, both economically and politically. Traditionally risk sensitive currencies have suffered the most, with the SEK the weakest of the G10 currencies other than GBP.

What happens now?
The UK will not leave the EU immediately. It has to apply to leave via Article 50 of the Lisbon Treaty. Cameron has said he will not do this, but leave it to the next Prime Minister, who will be in place by the Conservative Party conference in October.

Once the application is made, EU law will cease to apply to Britain after two years (though there may be complications as the terms of exit need to be negotiated and could potentially be vetoed by any of the 27 EU members).

Economic outlook
There is enormous uncertainty about the likely impact of the UK vote on the UK, European and global economy and consequently on markets. For the UK, the decision could lead to reduced inward investment from firms looking to do business in the EU, while UK firms may also be reluctant to invest in export related business until new trading relationships are clear.

However, there need not be a large impact at this stage as future arrangements will not come in for more than 2 years and may in the end not prove a great deal different to the current situation.

There is unlikely to be any immediate direct impact on the Eurozone economy, but the effect on confidence could be significant, especially if EU exit movements in other European countries gain momentum from the UK vote, increasing political uncertainty and turbulence.

Market implications
GBP is likely to stay weak for some time, and may well fall further. As noted above, the current level of GBP/USD is not actually far below where we were in February, so there is potentially more downside, especially since GBP is not particularly weak in real terms.

Inflation has been relatively high in the UK in recent years, so 1.30 in GBP/USD now is actually equivalent to something in the region of 1.60 10 years ago once relative price level changes are taken into account.

The outlook for other currencies is less clear. As long as risk appetite remains weak, as is likely to be the case for at least a month or two as the world assesses whether there will be any significant economic fallout, the USD and JPY are likely to be the more favoured currencies.

The EUR has in the past shown some safe haven qualities, but in this situation is likely to struggle at least until or unless data shows evidence that the fragile Eurozone economy is holding up. The CHF has typically been a safe haven, but has not gained much overnight, possibly because the Swiss National Bank have opposed CHF strength.

The chances of a Fed rate hike have also diminished. While a move is still possible this year if the impact from Brexit turns out to be modest, the Fed is now likely to stay on hold until at least Q4. However, as long as global risk appetite is weak, this is unlikely to undermine the USD, except possibly against the JPY. But the Japanese authorities are also likely to oppose further significant JPY strength.