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Pound Sterling had been weakening vs the Euro in the 12 months preceding the referendum vote, although proceeding by swinging to either side of the trend line. The 52 week best for the pound occurred on 20 July, 2015 at £0.69529 has since weakened to £0.83647; 1 July. This represents a nearly 21.879% decline. No doubt, asset traders were closely monitoring the polling as well as the bookmaking odds on the referendum. The expectation of the remain voters saving the day is reflected from 7 April through 25 May during which time Sterling recovered to £0.7602, almost 6%, from 7 April. As referendum day approached Sterling traded between £0.7602 to £0.7935 then strengthened following the BOE policy meeting, which may have been irrelevant at that point. The result of the majority decision to leave took sterling form £0.7666 to the 52 week low of £0.83647.

There is something to consider here which ECB President Draghi expressed in a speech4 in Portugal “...growing literature suggests that globalisation has created a common factor in inflation developments, which goes beyond fluctuations in energy or commodity prices. Higher import volumes have increased the importance of international prices and wages relative to domestic ones, making the global output gap more relevant... ...global forces that have led to very low real equilibrium interest rates across advanced economies... ...The global economy could also benefit from cooperation among spillover-initiating and spillover-receiving economies on how to mitigate unwanted side effects...”

The point of the matter is that the value of a local currency implicitly holds a percentage of value, either positive or negative, as a function to its relationship with the global economy. This is especially true for the EUR/GBP exchange. Had the ‘implicit value’ of the EU economy held by Sterling been negative, global market forces would have strengthened it after the vote, thus the implied EU membership premium was positive. For example, economists have long noted that the UK had been ‘importing deflation’ from the Eurozone. The secession trade removed that purchasing power from Sterling in expectations of higher import prices from the Eurozone as a consequence of being out of the ‘Free Trade’ Union.

Whether or not the worst for Sterling is over remains to be seen as negotiations proceed and by all accounts, this will not begin until the next prime minister decides to invoke Article 50 of the Lisbon Accord5. Until then, it’s difficult to expect Sterling to strengthen very much vs the majors, whilst auld acquaintance be forgot and never brought to mind.

Mike Scrive
Technical Analyst
Accendo Markets

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1 Committee of Scottish Bankers
2 Bank of England
3 Reuters 24 June
4 ECB Transcript 28 June [N.B.: Well worth reading in its entirety]
5 Lisbon Treaty, Article 50