Bastille Day celebrations in Nice, France were interrupted tragically by an attack that took the lives of almost 100 people. That terrible action is undoubtedly a terrorist attack, one which joins the sad roster of similar assaults that already includes Brussels and Paris.
President Hollande recently announced an extension to the state of emergency that France has been in since the attack took place. In the wider European context, Italy has imposed stricter controls along its border with France. On the economic side of things, travel companies have been hurt by all of these developments.
The currency markets have not been affected calamitously yet. Attitudes seem to be trending slightly towards risk aversion. This has led the Pound to strengthen slightly and reversed the recent downward trend of the Yen. Commodity currencies, on the other hand, have slowed significantly.
Why would the ongoing fallout from this news development affect the Pound more significantly than the Euro.
On one level, it’s simply the fact that GBP has always been more volatile on the market. With the Brexit debacle still unsettling the financial world, the pound is even more volatile than usual and there is no end in sight.
More On Brexit
Although the referendum is finished, there is no clear roadmap in place for an actual UK withdrawal from the Union. The latest terrorist strike may well lead to UK politicians stressing the need for a speedier exit. The implied tightening of immigration policies would be the major attraction here. However, free movement of workers is an integral part of the common market system, and even countries who do not fully participate in the Union (e.g. Norway) still need open borders to enjoy its economic benefits.
The terrorist threat could be the push required to convince the UK to split even further from the EU, forgoing real trade benefits in exchange for hypothetical gains in security. From an economic standpoint, that would make the UK withdrawal that much more hard-hitting.
British citizens who are doubtful of the European Union’s ability to provide security against external threats are likely to find their fears validated by the attack.
Sterling bounced all the way up to 1.3477 yesterday based on the lack of news coming out of the BOE. Cable rose after a short-term profit-taking until the pair settled into an equilibrium point at 1.3360.