Pound falls to lows last seen in 1985 within hours of Brexit

As the EU referendum polls closed at 10pm, investors were confident of a Remain win. Gambling markets showed that the probability of a Remain vote was close to 90%.

The pound hovered around $1.50, and the FTSE 100 index had closed the day ahead.

But as the first results from the north-east came in, showing an unexpectedly large degree of support of Leave, the pound plunged. By 4am, the gambling markets had flipped to discounting a Leave victory.

The pound was suffering one of the worst days in its history, dropping to $1.35, around its lowest level since 1985. The FTSE 100 index was predicted to be down by around 500 points, or almost 8%, when the markets open in the morning.

“It’s back to the future, we’re back to where we were in 1985,” said Nick Parsons, co-head of global currency strategy at NAB in London. “We’ve had a 10 percent decline in six hours. That’s simply extraordinary, and a vote to leave provides an existential crisis for Europe.”

There were knock-on effects in the rest of the world. The Nikkei 225 in Japan was down by 3% and Dow Jones futures in New York were showing a similar decline. The euro also dropped by 3% against the dollar, with Britain’s departure likely to have a adverse impact on confidence. 

Such a body blow to global confidence could well prevent the Federal Reserve from raising interest rates as planned this year, and might even provoke a new round of emergency policy easing from all the major central banks.

Risk assets were scorched as investors fled to the traditional safe-harbours of top-rated government debt, Japanese yen and gold.

The shockwaves affected all asset classes and regions.

Bank of Japan Governor Haruhiko Kuroda said the bank was ready to provide liquidity if needed to ensure market stability and a source said the Bank of England was in touch with other major central banks ahead of the market open there.

The big issues for the morning will concern the fallout. The Bank of England may be forced to step in, perhaps with a rate cut or liquidity support for British banks; that may help the equity market. Inevitably, there will be speculation about the future of David Cameron, the prime minister, and we may start to hear the views of businesses with regard to their future investment plans. There will be a lot more volatility ahead.