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    Sterling Sinks Below 1.40, UK Exit Risk Soars

    The odds are still against a British exit from the European Union but from a currency perspective the months of uncertainty ahead could be almost as damaging to the sterling as a rejection vote.

    The pound traded below 1.4000 against the dollar on Wednesday for the first time since the financial crisis. Except for a total of 15 days in the first quarter of 2009, and seven days in September and November 2000, it was the lowest for the British currency in thirty years. 

    Two recent polls showed 37 percent and 51 percent support for leaving the European Community. But with the vote not occurring until June 23rd, prominent British politicians choosing sides, and the electorate just beginning to focus on the arguments volatility is sure to remain high. 

    Until now the discussion has largely been on the terms and concessions that Prime Minister David Cameron would wring from the EU bureaucracy in Brussels. But the debate in the ensuing weeks will probably shift from the terms and nature of the UK’s relationship with the EU and its various institutions to the economic and political risks of leaving the Union.  

    The biggest hit to the sterling came on Monday when the Conservative and popular Mayor of London Boris Johnson announced that he would campaign for departure.  Sterling fell almost two figures to 1.4150 and has continued lower since.

    Nigel Farage leader of the euro-skeptic UK Independence Party criticized Cameron's EU deal, terming the Union a "burning building...in permanent, perpetual crisis" and urged a no vote on the referendum.  

    Markets are likely to become increasingly nervous on this issue, buffeted by the general uncertainty and lack confidence in polling data after the wide margin of failure in predicting the UK general election result in May.  

    Most polls had the election as too close to call but in fact the Conservatives won an outright majority in the House of Commons, Labor returned with the lowest number of seats since 1987 and the Liberal Democrats held onto just eight of their 57 seats.

     It is not only the risk of UK departure from the EU and the potential economic and financial turmoil that is roiling markets.

    An EU rejection would cause the newly empowered Scottish National Parry which won 56 of 59 seats in the country under Scottish First Minister Nicola Sturgeon to question the continuted association with the UK. She said over the weekend that a no vote on EU membership  would "almost certainly" be followed by a second independence referendum for Scotland.  In September 2014 Scotland voted not to leave the United Kingdom by a 55.3 percent to 44.7 percent margin. 

    Another risk to the euro is that the British deal with Brussels could embolden other European Union governments, from Italy to Spain, Portugal and Greece, to push for renegotiating the terms of their financial bailouts with EU, IMF and ECB.

    A wider problem is that other nations, especially those with strong ant-EU parties like France and the Netherlands will seek similar re-definition of their EU membership.

    For the next few weeks, as least until the markets have an initial  sense of the tenor of the British electorate,  polling will be as important to the sterling and the euro as any economic statistic or ECB pronouncement.   

     

    Joseph Trevisani

    Chief Market Strategist

    WorldWideMarkets Online Trading

    Charts: Bloomberg

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