Pound sees biggest fall in more than a year over EU referendum fears

  • BBC |
  • Monday 22 February 2016
Getty Images

Getty Images

The pound has seen its biggest drop in more than a year against the dollar amid uncertainty about a possible British exit from the European Union.

It fell 1.65% to $1.4167, the biggest one-day drop since 2 January, 2015.

The move follows London Mayor Boris Johnson joining the campaign to leave the EU after Prime Minister David Cameron set a June referendum date.

The steep fall, also seen against the euro, adds to losses made by the pound over recent months.

‘Sensitive’

So far this year, fears of a British exit from the EU – dubbed ‘Brexit’ – have already pushed the pound down by 3.9% against the US dollar. Analysts said that was likely to continue to direct sentiment until the vote.

“With political reaction to Friday’s deal looking more mixed than the prime minister would have hoped for, in the short term it is likely that the exchange rate will be sensitive to news which is seen to increase the probability of Brexit,” said Sam Hill, senior UK economist at RBC Capital Markets.

Against the yen, the pound slumped to 160.175 yen, its lowest since November 2013. Against the euro, it was down 1.2% to €1.27780.

“I don’t think investors are saying Brexit is good or bad, but it’s the uncertainty,” said Simon Smith, chief economist at FxPro.

Value of the pound against the US dollar

Source: Bloomberg

Source: Bloomberg

The pound has already dropped more than 17% against the dollar in the last 18 months, partly due to the outlook for UK interest rates.

Whereas the US raised rates last year, Bank of England governor Mark Carney hasruled out such a rise for now.

As a result sterling is seen as less attractive for investors, continuing to fall from the $1.7165 peak seen on 1 July, 2014.

A weak pound helps exporters by making British goods cheaper on international markets.

It also makes the UK a better value destination for tourists.

However, a weaker pound makes imports more expensive, possibly hurting consumers and businesses that rely on foreign goods.

‘Down the lift shaft’

David Cameron announced on Saturday that the EU referendum would be held on 23 June after he came back from Brussels with a renegotiation of Britain’s EU membership.

According to Mr Smith, the pound went “up the escalators” on Friday and “down the lift-shaft at the start of the Asia session” after the weekend’s events.

The intervention by Boris Johnson is being seen as a significant blow to Mr Cameron’s campaign to remain in the EU.

Several other senior Conservatives – including Justice Secretary Michael Gove – have already said they would join the Out campaign.

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