Investors expect volatility in financial markets to remain, as the U.K. attempts to sort out its relationship with the EU following last Thursday’s vote in favor of exiting the bloc.
“A key risk will be whether the reserve currency status of the pound would be taken away given potential instability in the U.K. economy,” said Bernard Aw, market strategist with brokerage IG. “Major rating agencies have already downgraded the U.K.’s credit ratings on account of lesser predictability and efficiency in policy making. If this happens, we would see renewed pressure in the [pound].”
Standard & Poor’s cut the U.K. two notches to AA from AAA Monday with Fitch following with a one-notch move to AA.
The pound GBPUSD, +0.4797% rose against the U.S. dollar overnight but during early Wednesday was slipping 0.2% to $1.3341.
Investors were pushing up safe-haven assets slightly, too.
Gold prices GCQ6, +0.17% rose 0.6% to $1,325.60 a troy ounce, and the Japanese yen USDJPY, -0.05% strengthened 0.4% to 102.27 yen to one U.S. dollar early Wednesday.
Yields on Japanese government bonds remained near record lows. Returns on the Japanese 20-year bond TMBMKJP-20Y, +15.21% reached a fresh all time-low of 0.039%, according to Reuters. Yields fall when prices rise.
To some extent, however, the market contagion from the U.K. vote appears to have been contained.
Earlier today, Japanese Prime Minister Shinzo Abe told his finance minister and the central bank chief to take any “necessary measures” to support the economy and financial markets, signaling his vigilance over the yen’s resurgence following the U.K. vote.