What Will the Brexit Do to the Pound?

In just three months citizens of the United Kingdom will vote in a referendum to determine if the nation remains part of the European Union or not. The possible British exit from the EU has been termed the Brexit. From the Forex point of view what will the Brexit do to the pound? Bloomberg Business sees the pound extending world’s worst losses through the June vote.

The pound is set to extend its decline, the biggest among rich-world currencies, beyond the day of the referendum that could lead to a “Brexit.”

Sterling has already dropped at least 2 percent versus all of its Group-of-10 counterparts this year, and options prices suggest it will fall further against every one over the next three months. That would see the U.K. currency’s losses extend beyond June 23, when the public will vote on the nation’s membership of the European Union.

While citizens of the UK may wish to leave the EU currency markets see it as a problem for Britain. The pound is down 4% this year and there is a premium for options protecting against GBP losses over contracts betting on a gain for the pound versus every G-10 currency. Why is this?

A Danger to the West

David Petraeus, retired American general and head of the CIA has stated that it is time for Western powers to come together and not split apart. The Guardian reports Petraeus saying that a Brexit would only make the world more dangerous.

In an article for the Sunday Telegraph, Petraeus wrote: “Given the dangers and challenges that threaten us around the world, this is a moment when the west and its institutions, including the EU, need to be drawing together – not pulling apart. At least from a national security standpoint, none of the problems the US and UK face will become easier to solve if the UK is out of the EU; on the contrary, I fear that a ‘Brexit’ would only make our world even more dangerous and difficult to manage.”

Business leaders in the UK have stated that a Brexit would cause severe damage to Britain’s economy. And thus the pound falls.

Will the Vote Be Yes or No?

According to the Financial Times a quarter of investors think Brexit is likely.

More than a quarter of some of the world’s largest investors believe Britain will vote to leave the EU in June and have begun taking measures to protect their investment portfolios.

According to a survey of 104 international pension funds and asset managers, 27 per cent said it was likely that the referendum scheduled for June 23 would result in a UK departure from the EU.

According to analysis compiled for institutional investors by MSCI, the index provider, the UK stock market would contract by 10 per cent and the global stock market by 2 per cent if Britain left the EU and the impact was just “limited”. In a scenario where the impact caused more “disruption”, MSCI predicted a 22 per cent fall in UK stocks and an 11 per cent slide in global equities.

The general consensus is that a Brexit would be worse for the UK than for the EU and worse for the GBP than for the Euro.