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Pound sterling falls sharply as Brexit continues to weigh on markets

The pound fell 1.8 per cent to $1.3432 on Monday

Hazel Sheffield

Monday 27 June 2016 10:21 BST

Sterling was trading around $1.45 ahead of the referendum on June 23

The value of the pound slipped almost 2 per cent on Monday morning as the EU referendum result reverberated around global markets.

A speech by the Chancellor George Osborne prompted a slight recovery as the stock market opened, with the pound trading 1.7 per cent down at $1.3497.

This was still slightly higher than its most severe low in 31-years of $1.3228, seen after the result came in on Friday.

Osborne breaks his silence

Sterling was trading around $1.45 ahead of the referendum on June 23 in which the UK voted to leave the EU by a margin of 52 per cent to 48 per cent.

"With recriminations, two main parties in turmoil and nothing but questions and uncertainty as far as the eye can see. I see no reason to buy the dip," said Kip Juckes, foreign affairs analyst at Societe Generale.

The euro has also fallen 0.6 per cent against the dollar, amid concerns that Brexit could destabilise Europe and lead to other departures from the Union.

6 ways Britain leaving the EU will affect you

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1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

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6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

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6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

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6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

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6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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The FTSE 100 opened slightly lower on Monday, down 0.7 per cent or 42 points, despite the speech by Osborne that was designed to reassure markets before they opened.

The actual fall on opening was slightly less severe than futures markets predicted. Futures suggested the index would fall by 2.8 per cent.

Analysts said that though uncertainty reigned, investors hadn't finished selling their assets yet.

“Things are so uncertain that investors still do not have a clear idea how much of their risk assets they need to sell,” said Hiroko Iwaki, senior foreign bond strategist at Mizuho Securities.

“But it is safe to assume investors are not yet done with all the selling they need to. I wouldn't be surprised to see another 10 percent fall in share prices,” she added.

Osborne told journalists gathered at the Treasury that he would do everything in his power to "make Brexit work".

"I don't resile from any of the concerns I expressed but I accept the vote and will do everything I can to make it work," he said.

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