Sterling dives after Boris Johnson backs Brexit

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The pound plunged to its lowest level in nearly a year today as London Mayor Boris Johnson’s backing for Brexit triggered fresh fears that the UK’s credit rating will be downgraded. 

Sterling fell 2.4 cents to $1.4166 this morning — its biggest dive since March 2015 — as City trading floors reacted with alarm to the news that one of the big beasts of the Conservative Party (pictured) would campaign to leave the EU ahead of a  June 23 referendum. 

The slump reversed gains made on Friday after Prime Minister David Cameron unveiled the outcome of tense negotiations in Brussels to amend the UK’s relationship with Europe.

The pound was also down against the euro, trading 1.65% lower at €1.277, but stock markets shook off the uncertainty with the FTSE 100 up 1% to break the 6000 barrier at 6011.66. Mining stocks led the rise, heartened by strengthening metal prices. 

JPMorgan shrugged off the uncertainty today by upping its rating on UK shares to overweight from underweight, saying the recent reduction in commodity exposure by FTSE firms gave it confidence the market could weather Britain’s departure from the EU. 

The prospect of a Brexit has prompted fears of a credit-rating cut back by agencies such as Moody’s and Standard & Poor’s (S&P). Moody’s today repeated its warning in December that it may revise the UK’s rating to a negative outlook if Britain votes to leave, while S&P said the UK faces a one-in-three chance of a downgrade.

“The pound is the biggest loser by quite some distance today and that is to some extent the Boris-effect,” CMC chief market analyst Michael Hewson said.

Goldman Sachs has said the pound could fall a 30-year low of $1.15 if the UK left the EU while Société Générale also said sterling would fall to “at least”  $1.30 if the UK leaves.  

“I think we are likely to see further sterling weakness ahead of the vote itself,” Société Générale analyst Kit Juckes said. 

The Brexit debate will be given added grit tomorrow when more than a third of FTSE 100 bosses release a letter backing Britain to stay in the union. Signatories are known to include the chairmen or chief executives of Vodafone, BAE Systems, GlaxoSmithKline, easyJet, Barclays, BT and Shell.

Vodafone boss Vittorio Colao said: “For our customers, our shareholders and our employees, it is much better Britain is part of Europe.” 

Investor nerves got a further pummelling today after a major study said the collapse of Europe’s Schengen, passport-free travel zone could cost the EU up to €1.4 trillion over the next decade 

The report, by Germany’s Bertelsmann Foundation, said reintroducing passport controls at EU borders would drive up import prices by 3%.

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February 23, 2016 |
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