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The polls and odds-making preceding the referendum were contradicting each other. Further, in several recent advance economy elections, including the UK, all candidates seemed to defy what the polls had foretold. Thus, it might be that in the weeks preceding the actual vote, the BOE was as uncertain of the outcome as was the rest of Europe. Excluding the vote, what was the mindset of the BOE in regards to the economy and policy? At the 12 May meeting2, the BOE maintained its current and long standing policy noting that “...Twelve-month CPI inflation increased to 0.5% in March but remains well below the 2% inflation target... ...Core inflation also remains subdued, largely as a result of weak global price pressures, the past appreciation of sterling and restrained domestic cost growth...”   It’s reasonable to assume that aside from low petroleum prices, low import prices, particularly those from the continental part of the EU in the free trade zone. The strong Sterling advantage has surely been lost. The BOE seemed in agreement with the SNB on the improvement in China; both made different observations about the US. “...In the advanced economies, growth has picked up in the euro area in Q1 but slowed in the United States.  A modest pace of growth in the United Kingdom’s main trading partners is likely over the forecast period...” This has certainly brought to an abrupt halt, also. Keep in mind that the BOE considered the US slowdown weeks before the Fed changed its bias after several key economic indicators weakened.

The 16 June assessment3 noted the same weak inflation and had surely now become well aware of the loss of economic momentum in the US. The wording changed a bit but still singled out the lack of progress in China and emerging markets. However, the UK-EU referendum had become a front and center issue: “...On the evidence of the recent behaviour of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply...”; indeed it has. It should be noted that Sterling had gained significantly on the US Dollar but has weakened vs the Swiss Franc before the vote came in. The SNB made good on its promise and intervened as the referendum results came in.

The BOE concern over the economic shocks was directly noted: “... This would be consistent with changes to the fundamentals underpinning the exchange rate, including worsening terms of trade, lower productivity, and higher risk premia...” When the SNB removed the Euro peg, the Franc strengthened significantly which might have been expected. However, what might not have been unexpected was the duration of a significantly overvalued Franc. True, the Franc is a traditional safe haven currency.

It’s not unreasonable to expect Sterling to strengthen a bit as the ‘dust settles’ and everyone takes a pause to assess the damage, but not nearly to its pre-referendum level. Lastly, a further political pressure may come in the form of the future of the UK itself. Scotland has a legal currency, but there is no official legal tender4: “...Bank of England banknotes are only legal tender in England and Wales... ...The acceptability of a Scottish or Northern Ireland banknote as a means of payment is essentially a matter for agreement between the parties involved... It seems that under the current Scottish currency regime, a loophole exists; the Euro will be perfectly and quickly acceptable in Scotland, particularly in the wake of a Scottish secession from the UK, if that should be.

Mike Scrive
Technical Analyst
Accendo Markets

CFDs, spread betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.

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1 SNB Press Release 16 June
2 BOE News Release 12 May
3 BOE News Release 16 June
4 BOE