- GBP/EUR exchange rate plunged after surprise ‘Leave’ campaign victory – Opinion polls failed to correctly predict outcome
- Pound turned bearish amid panicked market response – Currency plunged across the board due to Brexit uncertainty
- Euro boosted by safe-haven demand despite associated Brexit risk – Outlook of single currency muted by fears over future of the EU
- Volatility predicted to continue for GBP/EUR pairing – Political developments likely to remain dominant Pound influence
Markets were shocked on Friday after the UK unexpectedly voted in favour of a Brexit, prompting a sharp fall in the GBP/EUR exchange rate. Although the pairing has recovered from the low of 1.20 recorded in the early hours of this morning, the Pound remains around 7 cents lower than the 1.31 level it was achieving yesterday.
Shock Vote to Leave EU Prompted Sharp Pound (GBP) Exchange Rate Slump
Throughout the week markets had taken an optimistic view of the Pound (GBP), with opinion polls pointing towards a ‘Remain’ vote triumph and the bookies indicating that the majority of bets had been placed on the UK opting to remain part of the EU. However, that confidence ultimately proved to be misplaced, as the ‘Leave’ campaign surged to an unexpected victory. As the Pound to Euro (GBP/EUR) exchange rate had already largely priced in the impact of a ‘Remain’ vote this naturally led to a sharp slump, pushing the pairing to a low of 1.2037 overnight.
This initial shock began to wear off over the course of Friday morning, although investors were further discouraged by the news that Prime Minister David Cameron had resigned in the wake of the result. With uncertainty rife and markets scrambling to adjust to this unexpected change in the status quo, Pound volatility is likely to remain heightened for the foreseeable future. Even so, markets took some reassurance from comments made by Bank of England (BoE) Governor Mark Carney, who reiterated the central bank’s willingness and ability to do what is needed to support the domestic economy.
Euro (EUR) Benefitted from Pound (GBP) Weakness despite EU Stability Fears
Confidence in the Euro (EUR) was somewhat dented by the vote for Brexit as well, however, thanks to the potential ramifications that the event will have for the EU and the Eurozone by extension. As Jane Foley, Research Analyst at Rabobank, noted:
‘In the wake of Brexit, several countries will be examining their relationship with the EU. Surveys have highlighted that anti-EU sentiment is high in countries such as Italy, Spain and France. While countries such as Denmark, Sweden and the Netherlands will have to come to terms with an EU which has a different centre of gravity. In reference to whether a Brexit could spark other countries to follow suit, German Finance Minister Schauble recently remarked that “you can’t rule it out”.’
Recent Eurozone data had also pointed towards a renewed slowing in domestic growth, with the June raft of Manufacturing, Services and Composite PMIs offering little cause for optimism in the outlook of the currency union. If growth is negatively impacted by a Brexit, as markets anticipate, then the European Central Bank (ECB) could well be prompted to enact further monetary loosening measures in order to counteract any renewed fall in inflationary pressure.
GBP/EUR Exchange Rate Forecast: Pound to Stay Softened under Brexit Volatility
Ahead of the weekend, and beyond, the Pound is expected to remain under pressure as investors continue to adjust to the altered political landscape. Markets will be closely watching domestic developments, with speculation over how the UK’s future relationship with the EU is expected to develop likely to trigger further volatility.
Ecostats are likely to remain side-lined by the market reaction to the UK’s historic decision in the coming days, with uncertainty expected to remain the dominant market force for some time to come. Although the contagion of Brexit-based fear is expected to provoke negative headwinds for the Eurozone it seems likely that safe-haven demand and weakness in the Pound will continue to support the Euro.
Current GBP, EUR Exchange Rates
At the time of writing, the Pound to Euro (GBP/EUR) exchange rate was slumped in the region of 1.2375, while the Euro to Pound (EUR/GBP) pairing was making strong gains around 0.8078.