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Brexit referendum devalues sterling

Published Tuesday, February 23rd, 2016

Britain goes to the polls in 121 days’ time on June 23 to vote on whether to stay in or leave the European Union. The market verdict on Day 1 is that the vote will be closer than expected resulting in a run on sterling that took the cable down to $1.4059 at one point. Britain has achieved a devaluation without any help from QE or negative interest rates.

Good news for inflation and exporters but it is doubtful that there are any smiles on the faces of Bank of England officials. They want inflation that comes from growth, improving domestic demand and rising wages. They do not want stagflation or to hear warnings from Moody’s that Brexit jeopardises the UK’s credit rating. This is going to be a very long and tumultuous four months – fascinating and horrifying all at the same time. Is Brexit a “leap in the dark” as David Cameron wants or ‘leap into freedom’ as Boris Johnson and fellow ‘outers’ claim?

As Britain enters four months of agonising the eurozone continues to stumble with the Markit flash PMI composite output index coming in at a 13-month low of 52.7 for February down from 53.6 in January. Both manufacturing and services PMIs are down. For Brexit campaigners it is further evidence that the UK needs to detach itself completely from the failing monetary experiment at the heart of the EU.

Yesterday’s oil price rally is difficult to explain. Brent gained $1.68 bbl to close at $34.69 and WTI gained $1.64 bbl closing at $33.39 bbl. Perhaps a ninth consecutive week of US oil rig cuts taking the count down to 413 was the spark, reminding everyone that the cuts are a precursor for much lower production to come. Perhaps it was the comments by the OPEC Secretary-General at the CERA conference in Houston that a production freeze is a “first step”.

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Posted by David Hufton