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    Pound slumps to 7-year low vs dollar as Brexit campaign gathers pace

    The British pound slumped to a 7-year low against the US dollar on Monday as those campaigning for the UK to leave the EU secured the support of the London Mayor, Boris Johnson. Sterling hit a 2009-low of 1.4056 versus the dollar, while the pound index fell to a near two-year low of 85.70. The uncertainty over the fate of Britain’s membership in the European Union also weighed on the euro, pushing it below 1.11 dollars, as a UK exit is seen as negative to the EU as well as for Britain.

    On Friday, UK Prime Minister David Cameron struck a deal with his EU counterparts to give the UK special status on a range of areas that had disgruntled British voters over the years, causing divisions within the Conservative party and giving rise to far-right parties such as UKIP. Some of the changes that Cameron secured for the UK are an “emergency brake” on migrant benefits for up to four years, protection for the City of London from Eurozone financial regulation, and exclusion of the UK from further political integration of the EU.

    The campaigners for the ‘in’ or ‘out’ referendum did not waste any time after Cameron on Saturday set the date for the vote for June 23. The ‘no’ camp had been seen as lacking a strong figure to lead the campaign until London Mayor, Boris Johnson, decided over the weekend to join the “Brexit” side. The decision comes as a major blow to David Cameron who had been hoping to get Johnson on his side given that he is seen as a possible leadership contender for the Conservative party and is one of the more popular members of the government.

    Other leading Conservatives such as Justice Secretary Michael Gove and Work and Pensions Secretary Iain Duncan Smith had already declared their widely-known desire to lead the UK out of the EU. With 70 Conservative MPs known to be in favour of a “Brexit”, it is thought there may be up to 150 Conservative MPs that could join the ‘no’ campaign.

    Aside from possibly causing a split within the ruling Conservative party that would lead to a leadership contest for David Cameron, a ‘no’ vote could reignite support for Scottish independence where membership of the EU in Scotland is far stronger than in England. The latest polls put the ‘in’ vote ahead with 54% of the vote versus 46% for the ‘no’ vote.

    The potential economic risks to the UK from leaving the EU were highlighted on Monday when Moody’s issued a warning that such a decision would be “credit negative” for the UK economy. Ten-year gilt yields of UK government bonds spiked up to 1.454% today from Friday’s low of 1.375% in response to the potential downside risks, before easing to 1.398% in late European session.

    London’s leading share index, the FTSE-100, shrugged off “Brexit” fears, gaining 1.7% towards the close of trading as a recovery in mining stocks dominated the mood. Currency markets were more concerned though as the pound’s brief recovery from Friday’s positive outcome was reversed on Monday. The pound fell to the lowest since November 2013 versus the yen to 159.12 yen, while the euro was back above 0.78 pounds.

    Sterling has now erased all of its gains from 2015 when expectations of an interest rate hike by the Bank of England had driven it to the highest since early 2008. The combination of muted inflation and “Brexit” uncertainty have pushed back the likelihood of a rate rise until at least the end of 2016, triggering a sell-off of the British currency.

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