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 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.