The US Dollar in the Aftermath of the Brexit Vote

GBP has dropped more than 8% against USD in the aftermath of Brexit vote. This is a serious concern and one should be alarmed if they trade US dollars.

Brexit 52% vote over 48% Bremain vote sent shockwaves in the International financial market on Friday. This marked an end to UK’s 43 years EU membership in a referendum that attracted a record 72% of the registered voters. The pound dropped more than 8% against the dollar in the early trading session while its Euro counterpart was down more than 7%. In the run up to the voting day, polls showed a tightly contested campaign too close to call with major pollsters showing a bias towards remain.

At 2100GMT the polling stations closed, YouGov polls showed remain with its nose ahead of leave by a 4 point lead at 52% remain Vs 48% leave. Another survey carried out by ComRes implied a 6 lead at 48% remain compared to 42% leave camp. At the end of the Friday trading session, assets worth over $10 trillion had been wiped out of FTSE benchmark as the yield on 10-year UK government bond fell below 1% for the first time in history as reported by Sky News.

It will take approximately two years for Britain to formally withdraw from the EU. Until 2007, there was no formal procedure for member states to withdraw from the EU. No member state has ever rescinded its EU membership even though the Lisbon treaty sets out the withdrawal procedures.

David Cameroon resigned after the vote, in The Guardian article “I was absolutely clear about my belief that Britain is stronger, safer and better off inside the EU. I made clear the referendum was about this, and this alone, not the future of any single politician, including myself.

“But the British people made a different decision to take a different path. As such I think the country requires fresh leadership to take it in this direction,” Cameron said.

While many outsides see the brexit as “a vote of no confidence” in the ruling class of London, some claim it is the beginning of the fall of the biggest single trading market in the world. If the second argument holds, a domino effect is waiting to be unleashed with the “Exit bug” biting countries like France, Netherlands, Germany and maybe even some of the Eastern Europe countries following in the footsteps of the Britons. In the end, NATO will be the only Union holding the continent together.

The leave camp lead by former London mayor Boris Johnson, centered their campaign slogans and rhetoric around influx of illegal Immigrants from other European countries and the Middle East. They equally charged at the EU for taking away sovereignty of UK people from London to Brussels. The Remain side staged fierce contest, making a strong economic case against leaving the EU. David Cameroon and his closes allies in the Conservative party cautioned the Britons about the costly economic price of leaving the EU (WSJ).

Britain exports more than 50% of its economic output to the EU making EU its biggest trading partner. UK is the second largest economy in the single monetary block only after Germany and the fifth largest in the world. London is home to some of the big multinationals with London Security Exchange the biggest bourse in the world by trading volume.  Economic ripples effects originating from UK’s Brexit vote will be felt across the globe. Reuters reports today; "Concern over another euro area crisis could slow U.S. growth in the next couple of quarters through weak financial markets and declining business and consumer confidence," said Ethan Harris, global economist at Bank of America Merrill Lynch.

Bank of America Merrill Lynch and Goldman Sachs have both cut their forecast for the Sterling pound against the dollar in the near to long term.

The US dollar regained its safe haven status with a strong rally against the pound, Euro and the commodity block currencies on Friday. The Yen was not spared either as the Abenomics rally which begun is 2013 was wiped out by the strengthening yen as investors sort to stashed their cash in Yen due to uncertainty in the financial markets. US dollar declined the most on a single day on Friday against the yen since 2007-08 GFC.

CNBC June 15 Feds meeting, FOMC held the US interest lending rate at 0.25 following 25 basis point rise in December last years. The FOMC chair Janet Yellen reiterated that concerns from “Brexit” and weakening labor market conditions in the US were standing on the way of the tightening cycle back to normal interest rates. The US dollar declined against major currencies on the hold off. Austerity measures in a post brexit recession in the UK could force the Feds to reverse their outlook on the US and world economy which may call for rate cuts in the coming months. Further decline of the US dollar against major currencies is therefore eminently on the cards.

Articles based on: 
Forex