What's going on?

There were some significant political developments over the weekend as the �Brexit� (British exit from the European Union (EU)) referendum was called and�a key politician, London�s mayor Boris Johnson, said he would support leaving the EU. On Monday, the market began reflecting a perceived greater likelihood that Britain would vote to leave – and the pound dropped 2% versus the US dollar (hitting its lowest level since 2009).

What does this mean?

Why do people think that Britain leaving the EU would be bad for the value of the pound? It�s argued that, in the near term at least, the UK would have lower economic growth, exports would decline and less investment would come into the country. All of those things hurt the value of the pound as it decreases demand for it (e.g. investors would invest in higher growth economies and have to buy a different currency in order to do so).

Why should I care?

The bigger picture: It�s not totally clear that leaving the EU would be bad for Britain in the long-term � economically at least. The consensus opinion seems to be that leaving the EU would be bad for the economy. However, a recent report from a leading macroeconomic consultancy suggested that while it would likely be painful for some parts of the economy in the near term, in the longer term it could actually be a positive (because of things like more control over immigration and an ability to negotiate Britain�s own trade deals – you can read the full report here).

For the markets: The uncertainty alone will likely weaken the economy. It�s tough for businesses to plan for an uncertain future. Therefore, in situations like this, the natural reaction is for companies to slow down making investments (e.g. hiring people or buying expensive equipment). For example, a firm that deals a lot with European clients isn�t likely to start expanding its operations until there is more clarity about its ability to sell to those clients in the future.