Pound dips most as London Mayor backs ‘Leave’ campaign

London / Bloomberg

The pound fell the most since May 2010 after London Mayor Boris Johnson, one of the U.K.’s most popular politicians, said he’ll campaign for Britain to leave the European Union in a June
Sterling dropped at least 1.1 percent against all its 16 major peers, reversing a gain made on Friday when Prime Minister David Cameron secured a deal on membership terms with EU leaders in Brussels. The next day, Cameron said he would fight to keep Britain in the bloc, and set a June 23 date for the vote. Gauges of pound volatility versus both the dollar and euro surged to the highest levels since 2011 as Conservative MP Johnson’s backing of a so-called ’Brexit’ pitted him against the prime minister.
“The pound is tumbling after the deal clinched by Prime Minister Cameron at the EU summit failed to alleviate fears about Brexit,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London.
“The fact that prominent members of the Conservative Party announced they will campaign for Britain to leave the EU likely underscored investors’ concerns that Brexit risks could increase from here despite the deal.”
The pound dropped 1.7 percent to $1.4163 as of 11:01 a.m. in London, set for the biggest decline since the day of the U.K. General Election on May 6, 2010. While the currency is down 3.9 percent this year, it remains above an almost seven-year low of $1.4080 reached in January.

Higher Volatility
Sterling weakened 1.1 percent to 78.15 pence per euro. Although the announcement of the date removes one aspect of ambiguity for traders, they now face months of polls and campaigning that may boost volatility further. With traders already pushing back bets on the timing of a Bank of England interest-rate increase, the prospect of Britain leaving the world’s largest single market had been causing further concern, helping push down the pound against all of its Group-of-10 peers this year.
The options market signaled more losses ahead for the pound. The premium for options protecting against a decline in the pound versus the dollar, compared to those insuring against an increase, were the most since 2010, according to six-month risk-reversals.
“The pound’s weakness is a product of uncertainty of the U.K.’s ongoing membership of the union, not the timing of the poll,” said David Page, a senior economist at AXA Investment Managers in London. “Weakness is likely to reflect any increased perception of the likelihood to leave and as such is likely to be a constant feature over the coming months.”
Cameron is due to address lawmakers later Monday. Economists at HSBC Holdings Plc, Britain’s largest bank, said the make up of the U.K. could be called into question if it votes to leave the EU but Scotland or Wales want to stay.
Moody’s Investors Service said a Brexit would be negative for the nation’s credit rating, as the economic costs would outweigh any benefits.
Goldman Sachs Group Inc. said earlier this month if Britain quits the EU the pound may fall to $1.15-$1.20 — levels last seen in 1985. HSBC said in January a forecast for a jump to $1.60 by year-end relied on the nation remaining in the 28- member group.

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