‘Hard Brexit’ worries push pound to 31-yr dollar low
IMF sees Brexit damage to British growth
LONDON, Oct 4, (AFP): The pound slumped to a 31-year low against the dollar Tuesday on concerns over the timing and terms of Britain’s planned exit from the European Union, traders said.
Britain’s currency also struck a fresh three-year low point against the euro, while the drops helped pushed London’s benchmark FTSE 100 stocks index up to a 16-month high beyond 7,000 points as British exporters stood to benefit from a weaker pound.
The British economy has showed signs of improvement in the months since the shock vote to leave the EU but there are concerns about the wider long-term impact of the bloc losing its second-biggest economy.
British Prime Minister Theresa May said at the weekend that her government would start the process of leaving the EU within the next six months — possibly leading to Britain severing ties with the single market.
The pound on Tuesday struck $1.2740 — its lowest level since 1985.
Sterling meanwhile traded at 87.66 pence to the euro — the weakest level since 2013.
“It seems that it is going to be hard to provide a tourniquet for sterling’s recent wounds given the solidity of the newly announced Brexit timeline,” said Connor Campbell, analyst at traders Spreadex.
“In terms of silver linings, the pound’s protracted demise has continued to lift the multinationals that make up the FTSE 100, leaving the index back above 7,000 for the first time in 16 months.”
The FTSE rallied to a gain of 1.8 percent in mid afternoon deals, compared with Monday’s close.
“The reality is the biggest stocks in the index dominate its performance, and the likes of HSBC, Royal Dutch Shell, and British American Tobacco all have international earnings which are now worth more in pounds and pence thanks to sterling’s decline,” said Laith Khalaf, senior analyst at stockbrokers Hargreaves Lansdown.
The International Monetary Fund on Tuesday cut its 2017 growth forecast for Britain, blaming Brexit, and warning the damage could be greater if rocky negotiations lead to trade barriers.
The IMF said it now expects Britain’s gross domestic product (GDP) to expand by 1.1 percent in 2017, a downgrade of 0.2 percentage points from the previous prediction given in July.
That marks a significant slowdown compared with its estimate for 2016, the IMF said in the latest edition of its World Economic Outlook.
The British economy is now expected to grow by 1.8 percent this year, up 0.1 percentage points from prior guidance.
“In the United Kingdom slower growth is expected since the referendum as uncertainty in the aftermath of the Brexit vote weighs on firms’ investment and hiring decisions and consumers’ purchases of durable goods and housing,” the IMF said.
It added its assumptions are based on “smooth post-Brexit negotiations and a limited increase in economic barriers”.
However that may not turn out the case.
The single market gives Britain tariff-free access to the EU.
Meanwhile finance minister Philip Hammond warned Monday of “turbulence” in the British economy during the negotiations.
May also said at the weekend that Britain would start the two-year process to leave the EU by the end of March.
Britons voted in a June 23 referendum in favour of leaving the EU, sending shockwaves reverberating across financial markets.
“The unexpected vote for Brexit on June 23 leaves unclear the future shape of the United Kingdom’s trade and financial relations with the remaining 27 European Union (EU) members, introducing political and economic uncertainties that threaten to dampen investment and hiring throughout Europe,” it warned.
The IMF also signalled Tuesday that the British government — which is due to unveil its budget update on November 23 — may need to re-assess its deficit-slashing measures in a bid to bolster growth.
“As greater clarity emerges on the macroeconomic impact of the Brexit vote, the need for further near-term discretionary fiscal policy easing and the appropriateness of the medium-term deficit target should be assessed, possibly in the context of the upcoming November fiscal review,” it said.
The IMF acknowledged that the Bank of England’s wide-ranging stimulus programme had buoyed sentiment.