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Markets plunge as UK Decides to Leave the European Union

Markets plunge as UK leaves the European Union


The financial markets reacted strongly to the surprising result where the UK voted to leave the EU, in what was one of the most tightly contested polls but also saw one of the highest voter turnouts in British history. The outcome of the verdict also saw British Prime Minister David Cameron resigning from his post.

 

Weekly Review


Brexit news dominated the markets last week. While initial polls suggested that the 'Remain' camp gained a lead which in turn saw the global markets rally and price in a 'Bremain' the markets were caught off guard as the final poll results showed that Britons voted to leave the EU by a majority of 51.9% to 48.10%. Following the surprise poll results, global markets plunged with the sterling taking a strong hit, falling to $1.323, the lowest level seen since 1985. The strong declines came just hours before, when GBPUSD was trading at $1.50.

Central bankers were quick to follow, with BoJ Governor Kuroda offering to assist the Bank of England to keep liquidity in the markets. Later in the day, Bank of England Governor, Mark Carney said that the central bank remains ready to inject 250 million GBP as additional liquidity measures. The Swiss National Bank, for its part announced that it had intervened in the currency markets to stem the Swiss franc’s appreciation and noted that the central bank was closely monitoring the developments.

After the official results were announced, British Prime Minister, David Cameron offered his resignation and did not invoke the Article 50 which would trigger the countdown to exiting the EU. He said that he would remain at the helm until October 2016 when UK is likely to elect new officials to governments.

The fast developing news saw investors run to safety. USDJPY briefly fell to 98.90Yen while gold prices surged to $1356 an ounce before pulling back modestly. The euro was also hit as the single currency fell to $1.090, marking a 3-month low.

 

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The Week Ahead


Brexit is most likely to continue to dominate the currency markets next week. However, a few important economic releases from Canada, Eurozone and the US will play a role in shaping the markets during the week.

In Canada, monthly GDP numbers will be released on Friday which is expected to show a month over month increase in GDP by 0.20% in April. This follows March's GDP contraction of 0.20%. In the Eurozone, German, French and Eurozone inflation data will be on the tap and is expected to show a decline in inflation. Eurozone inflation in particular is expected to remain flat on the month, while German and French inflation is expected to moderate following a modest increase in May.

In the US, Fed Chair Janet Yellen will be speaking over the week. The markets could pay attention to Ms. Yellen's speech in the aftermath of the Brexit referendum outcome. Economic data from the US includes final revision to the first quarter GDP which is now projected to be higher at 1.0%, following the second revision at 0.80%. Core PCE data is expected to be released later in the week but no major changes are expected.

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