The pound sterling plunged to an almost seven-year low against the US dollar on Monday amid fears of the UK potentially leaving the European Union.
At one point during the day the pound fell as much as 2.4% against the dollar, at $1.4058 – the lowest level since March 2009.
The steep decline came following an announcement by London Mayor Boris Johnson that he is in favour of the UK leaving the EU.
Boris called for a second EU referendum.
However, Prime Minister Cameron told MPs there could be no second referendum after the vote to leave the EU on 23 June.
“I have known a number of couples who have begun divorce proceedings,” Cameron said referring to the possibility of a second vote. “But I do not know any who have begun divorce proceedings in order to renew their marriage vows.”
Fears of a potential ‘Brexit’ has already caused the pound to shed more than 4% of its value against the dollar.
Analysts believe that ‘Brexit’ will continue to have a major impact on the pound until the vote.
Sam Hill, senior UK economist at RBC Capital Markets, was quoted by the BBC as saying: “Today’s weakness appears to reflect an increased probability of Brexit after political reaction to the new deal on EU membership was more split than the PM would have hoped,”
The reason why a possible ‘Brexit’ is concerning investors is due to the impact it could have on the country’s economic prospects. Fewer investors are keeping hold onto sterling-denominated assets.
Citi bank economists increased the probability of the UK leaving the EU from between 20%-30% to between 30%-40% since Johnson joined the ‘Brexit’ campaign.
In an ING research note titled “You ain’t seen nothing yet”, the bank said: “The role of Brexit in steering recent pound price action can be likened to a rollercoaster warming up with some small twists and turns before an inevitable sharp drop.”
Nicholas Laser-Ebisch, analyst at foreign exchange company Caxton FX, told The Guardian that the pound will likely continue to weaken over the next four months.
“Inflation, Bank of England meetings, and other economic indicators will likely not carry as much weight between now and June when it comes to the value of the pound, as the major factor in the back of everyone’s mind will be whether or not the UK will still be an EU country at the end of the summer,”
