Britain has voted to leave the European Union (EU). Results from the referendum showed that 51.9% voted to leave the EU, while 48.1% voted to stay.
The fact is that while some polls predicted this would happen, others didn’t. As a matter of fact, before the vote, the majority of traders believed that Britain would stay in the EU. Boy, were they in for a big surprise.
After the results came out, the GBP crashed against quite a few major currencies. The pound to euro dropped 5.08%. At one point, the GBP/EUR was down as much as 8.3%. However, the biggest activity was found in the pound to dollar exchange rate, which fell as much as 10%. This also sent the British pound to its lowest level against the U.S. dollar in 31 years.
The shockwaves didn’t stop at the currency market. After the results came out, stocks around the world had at least $2.0 trillion wiped off their value. As you would expect, Europe was hit particularly hard. In the U.K., the FTSE 100 plunged as much as 8.7% before starting to recover. In Germany, the DAX dropped 5.6%. In France, the CAC40 was down 6.9%.
Why did markets react like this? It’s all about the uncertainty that is now surrounding Britain’s future. With a 52–48 margin, it’s highly unlikely that we would see Britain leaving the EU.
If that happens, it would significantly impact investment in the U.K.—the fifth-largest economy in the world. It could even threaten London’s role as one of the global financial centers. You can just imagine the downward pressure this would put on the British pound.
Then there’s the political uncertainty. British Prime Minister David Cameron announced his resignation after the results came out. He said he would likely be gone by the time of the Conservative Party conference in October.
The Bank of England—the country’s central bank—tried to calm the plunging markets. Governor Mark Carney said the bank would offer to provide more than 250 billion pounds (US$347 billion) in liquidity. (Source: “EU Referendum: Statement from Bank of England Governor Mark Carney,” BBC, June 24, 2016.)
Still, it looks like uncertainty could continue to prevail. The British pound may not have found the floor just yet.