ECB likely to closely monitor Brexit developments, seek to stabilize markets

The European Central Bank is expected to closely monitor the developments that are rising and are deemed to take place post the Brexit win in the June 23 UK referendum. Soon after the UK’s unexpected decision in favor of the 'Leave' (the European Union) vote last week, ECB officials assured that they stand ready to stabilize sentiments and markets, if required, to contain the fallout of Brexit, DBS reported.

Apart from UK’s Leave vote win last week, worries are still mounting that other EU member countries may also seek to hold their own referendums including Netherlands, France, Spain and Greece. This causes a potential danger to a break-up of the European Union that threatened the currency bloc 3-4 years ago.

Meanwhile, the UK economy continues to face headwinds as the GBP/USD slipped to record lows yesterday and equity indices tumbled. S&P and Fitch lowered its ratings, while maintaining a negative outlook. While the GBP slipped, the knock-on n impact on the EUR/USD has been less by comparison, as the latter eased to the mid of the recent 1.05-1.15 range on Monday.

However, the ECB will face difficulty especially if oil prices slip anew and stoke deflation concerns, in essence negating the effect of host of policy easing measures undertaken till date. The central bank’s policy decision has sparked fresh uncertainties over its policy decision that was expected to stay pat, at least until 4Q 2016 to assess the impact of measures already undertaken.

Meanwhile, core EU members have called for early negotiations relating to UK’s exit from the bloc. Given the political turmoil that the country is facing, it remains uncertain if these negotiations will before the transition in October.