It's what happens when one of the most revered currencies in the world starts to act a little bit like the currency of a smaller, developing economy.
As 6:40 a.m. Eastern time, the pound was trading at $1.32, down more than 3 percent from Friday's closing price. The pound fell 10 percent on Friday in its largest decline on record, to its lowest point in 31 years. Analysts say the sell-off is likely to continue.
"We don’t know yet what the magnitude of the shock will be,” Steven Barrow of Standard Bank Group in London told Bloomberg. “So far, in terms of sterling-dollar, we’ve seen half the decline we’re likely to see this year.”
The decline in the pound is a response to global concern that demand for British goods and services will decline as the U.K. extricates itself from E.U. Membership in the E.U. has guaranteed British firms ready access to continental markets, allowing them to export goods to the mainland without paying tariffs or dealing with other restrictions.
If companies in the U.K. now have problems reaching the rest of Europe with their products, then the U.K. would also become less attractive to investors worldwide, who might shift business across the English Channel. Fewer Brits would find work with foreign firms, potentially including in the City of London, long the locus of financial activity for Europe as a whole.
In all, these changes would imply less need for British labor and British products and less demand for British pounds with which to pay for them. Such shifts could also imply a contraction in economic activity in the United Kingdom. While weaker currencies tend to boost countries facing recession, this time the benefits may not be materialize.
"For the U.K., this creates enormous uncertainty, but it also is a fundamental change in their competitiveness. And I don’t think even the very large fall in pound sterling that we’ve seen is going to be enough to make up for that," said Adam Posen, the president of the Peterson Institute for International Economics in D.C. on Friday. "They had a role in Europe as a financial center and even almost more importantly as a beachhead for foreign companies, particularly U.S. companies wanting to export into Europe. And that’s frankly going to go away, not entirely but a lot more and a lot faster than many people seem to think."
He added that "this really big, sustained drop in the pound — which I think will be sustained, I think it’s a legitimate revaluation down of the pound — is likely to have big inflationary effects."
During recessions, prices often — though not always — increase more gradually, or even decline. The U.K.'s situation is unusual, however. The fluctuations in the pound over the past few days are more characteristic of the currency of a developing nation, where economic activity can contract abruptly at the same time as the currency loses value if changes in global conditions cause international investors to withdraw their capital.
In the United Kingdom's case, by comparison, it seems that currency traders are anticipating a gradual withdrawal of capital because of the choice made by British voters, rather than any worldwide trend.
Mark Carney, the governor of the Bank of England, said on Friday that the British financial system was stable and "resilient." He also said that the U.K. central bank could make foreign currency available to British financial institutions. Doing so would help currency markets function smoothly in the event of a run on the pound.
"It will take some time for the United Kingdom to establish new relationships with Europe and the rest of the world. Some market and economic volatility can be expected," Carney said in a statement. "But we are well prepared for this."