Pound plunges as pres­sure mounts on May

Tory MPs’ dis­quiet hits ster­ling as an­a­lysts pre­dict fur­ther fall to par­ity with euro in next few years

The Daily Telegraph - Business - - Business - By Tim Wal­lace

THE pound fell sharply against the euro and the dol­lar yes­ter­day as fresh po­lit­i­cal tur­moil struck Theresa May’s frag­ile Gov­ern­ment and left mar­kets on edge.

Ster­ling dropped 0.8pc against both cur­ren­cies, to be­low €1.13 and $1.32, on re­ports of Tory MPs be­com­ing in­creas­ingly rest­less with the Prime Min­is­ter’s per­for­mance. An­a­lysts at UBS be­lieve the pound could fall fur­ther, edg­ing down against the euro over the com­ing years as the euro­zone’s econ­omy gath­ers pace. Ster­ling could even fall close to par­ity with the euro.

How­ever, the pound will be flat­ter against the dol­lar, UBS pre­dicts, as the green­back also weak­ens.

“Ster­ling has a very big cur­rent ac­count prob­lem,” said The­mos Fio­takis, UBS’s co-head of FX and rates strat­egy, cit­ing a fun­da­men­tal pres­sure which he sees as an over­whelm­ing fac­tor re­gard­less of daily news.

“It is not about Brexit, it is not about pol­i­tics, it is a very big un­funded cur­rent ac­count po­si­tion which is part of the rea­son ster­ling has been the weak­est link among UK as­sets,” he said. “Ob­vi­ously a de­cline in eco­nomic mo­men­tum also [leads to] a softer pound.”

Bri­tain has long im­ported more than it ex­ports, leav­ing a sub­stan­tial trade and cur­rent ac­count deficit which is funded by for­eign in­vest­ments into the UK. Mark Car­ney, the Gov­er­nor of the Bank of England, has called this “the kind­ness of strangers” and also sees it as a risk, should that fund­ing dry up.

UBS’s UK econ­o­mist, John Wraith, said the lat­est moves “are just an ebb and flow” but po­lit­i­cal woes “could be­come a more sig­nif­i­cant im­pact” de­pend­ing on do­mes­tic events and the Brexit talks. He said the UK’s in­ter­est rate was also sig­nif­i­cant, as the Euro­pean Cen­tral Bank and US Fed­eral Re­serve are both tight­en­ing mone­tary pol­icy, push­ing their cur­ren­cies up and so the UK’s down.

The Bank of England nudged in­ter­est rates up this month, but the com­bi­na­tion of slow rate rises, Brexit and the cur­rent ac­count deficit could push the pound down again. Mr Wraith fore­casts “euro-ster­ling go­ing to par­ity over the next two years – 10pc or 12pc down­side for the pound”.

“But it could be a lot worse than we think. We are still fore­cast­ing growth through the pe­riod and clearly that is not guar­an­teed.”

In­vest­ment bank No­mura sur­veyed its clients and found that only 31pc ex­pect any sort of tran­si­tion deal to be agreed by Jan­uary 2018, in­di­cat­ing a gloomy out­come has been priced in to the pound. As a re­sult there could be more room for a surge in ster­ling if the Prime Min­is­ter does make progress, and less for a slide in the pound if she fails to achieve this goal by the end of the year. Over­all, how­ever, much un­cer­tainty re­mains in the longer-term out­come of the Brexit talks, putting pres­sure on the pound over the years to come.

The fi­nanciers vot­ing in the sur­vey were split al­most evenly – 34pc ex­pect the UK to re­tain sin­gle mar­ket ac­cess through the Euro­pean Eco­nomic Area, 33pc think a free trade agree­ment will be struck as the Gov­ern­ment wants, while 28pc an­tic­i­pate no deal will be reached and so the UK will trade with the EU on WTO terms. The re­main­der – 6pc – ex­pect the UK to stay in the EU.

No­mura ex­pects ster­ling to weaken over the com­ing years, with a fall against the euro more than off­set­ting a mod­est strength­en­ing against the dol­lar.

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