‘Hard’ Brexit fears cause pound sterling to hit 32-year low.
ECONOMY
The pound sterling hit a 32- year low Monday ahead of a speech on Tuesday in which British Prime Minis- ter Theresa May is expected to lay out a so- called “hard” Brexit from the European Union and its single market.
The world’s third- most widely held reserve currency fell 1.6 per cent to reach a low of US$ 1.1986 in early London trading on Monday.
The l ast t i me it was below US$ 1.20 was in October.
That was during the socalled f l ash crash, when a sell- off by the Japanese operations of Citigroup Inc. is believed to have exacerbated a slide in the currency triggered by weak trading in Asia.
In an interview with Germany’s Welt am Sonntag newspaper, British chancellor Phillip Hammond admitted that an exit from the common market could rankle his country’s economy.
“If we have no access to the European market, if we are closed off, if Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage at least in the short- term,” he said. “In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness.”
Britain’s exit from the EU would allow the country to retake control of its immigration and remove it from the jurisdiction of the European Court of Justice, he said.
“We should be able to reach an arrangement to allow, on a reciprocal basis, access to each other’s markets without the political integration that membership of the EU has come to imply,” Hammond added.
The chancellor said he believes the U. K. and EU could reach a new arrangement in which key companies, for example auto giants such as Mercedes- Benz, BMW a nd Volkswagen, would be able to sell in the British market without having to fork over tariffs.
On Monday, Bank of England Governor Mark Carney used his first speech of 2017 to warn that the U. K.’s interest rates could go up or down.
Carney told an audience at the London School of Economics that the country is “entering a period of somewhat higher consumer price i nflation” and that U. K. households are “entire- ly looking through Brexit related uncertainties.”
The central bank head said this could cause a monetary policy to go “in either direction,” in order to fulfill the requirement of the Bank of England’s Monetary Policy Committee to maintain price stability, which the government defines as two- per- cent annual inflation.
While May has repeatedly signalled her government plans to take the U. K. out of the single market since the summer, her statements have often caused panic in foreign exchange markets, sending sterling sharply lower in October as well as last week.
“Considering how sharp the pound’s fall was this Monday it may have a bit of room to recover on Tuesday,” Connor Campbell, an analyst at Spreadex, said in a market update. “It has already processed the main thrust of what May will outline, meaning that if the PM provides a bit more detail about the U. K.’s strategy heading into talks with the EU ( even if it’s just a few crumbs) then the currency could rise on the increase in clarity.”
In addition to the currency volatility, Britain’s blue chip stock index closed down Monday after 14 consecutive days in the black. The FTSE 100 f ell 10.68 points, or 0.15 per cent, to 7,327.13.
“Since the referendum result, sterling weakness has been the core driver of stock gains, with recent ( purchasing manager i ndex) surveys and corporate earnings pointing toward a clear benefit to business of a weaker pound,” said Joshua Mahony, an analyst at FX Street, i n an i nvestment note. “With Theresa May’s speech due tomorrow, there is a possibility that another drop in the pound will mean that today’s mixed performance for the FTSE is just a pause for breath.”
The pound made its small recovery during afternoon trading in London following comments by U. S. president- elect Donald Trump, who said his administration will pursue a bilateral trade deal with U.K. after it leaves the EU.
On the possibility of a U. S.- U. K. trade deal, he told the Sunday Times: “We’re gonna work very hard to get it done quickly and done properly. Good f or both sides.”
On Monday afternoon, the IMF also raised its estimates for the U.K.’s economic growth for the second time since the Brexit vote, putting its 2017 GDP forecast at 1.5 per cent from 1.1 per cent.
A CLEAR BENEFIT TO BUSINESS OF A WEAKER POUND.