As Great Britain potentially parts ways from the European Union in the so-called Brexit, the British pound sterling dipped to a seven-year low against the U.S. dollar, with currency-related exchange traded fund falling to an all-time low.
The CurrencyShares British Pound Sterling Trust (NYSEArca: FXB), which tracks the movement of GBP against the USD, fell 1.5% Monday. The British pound sterling is among the worst performing developed market currencies this year, with FXB down 2.7% year-to-date.
The sterling was 1.8% lower against the greenback Monday, trading around $1.4146.
Fears of a Brexit intensified Monday after London mayor Boris Johnson joined the campaign, reports Ivana Kottasova for CNN Money.
“We are likely to see further sterling weakness ahead of the vote itself, as the debate rages and uncertainty undermines confidence,” Kit Juckes, a strategist at Societe Generale, told CNN Money.
Britain will vote on a June 23 referendum to determine if the country will remain with the union.
Many have expressed concerns over the economic outlook if Britain were to exit the European Union. British stocks were also under pressure, with the iShares MSCI United Kingdom ETF’s (NYSEArca: EWU) down 0.1% Monday while U.S. markets jumped 1.5%. EWU is down 6.5% year-to-date.
Moody’s has warned that it could downgrade U.K.’s credit rating if the country leaves the union.
“The economic costs of a decision to leave the EU would outweigh the economic benefits,” Kathrin Muehlbronner, a senior vice president at the ratings agency, told CNN Money. “It would likely lead to a prolonged period of uncertainty, which would negatively affect investment.”
For instance, by leaving the union, the UK would need to negotiate a new trade agreement with the EU that would preserve some of the trade benefits of EU membership. Consequently, without the union, UK exporters would be pressure.
David Page, an economist at AXA Investment Managers, on Financial Times argues that a Brexit could cause significant adverse impact on economic activity, with gross domestic product to be 2% to 7% lower.
“The immediate aftermath would likely result in substantial uncertainty weighing on investment, while UK households would struggle to maintain spending power amid an anticipated rise in import costs,” Page said.
The depressed GDP growth and more difficult export conditions would impact sectors like financial services, exporters, retail and property, which would also have an adverse effect on British equities.
CurrencyShares British Pound Sterling Trust
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