Pound slumps with fears of worse to come

Sterling falls 1.1pc against dollar and bond returns near record low over plans to suspend Parliament

THE pound suffered one of its sharpest tumbles of the year yesterday as City analysts warned that Boris Johnson’s plan to suspend Parliament will send it even lower in the coming weeks.

Investors rushed for protection from sudden swings in sterling after the Prime Minister asked the Queen to suspend Parliament for five weeks, cutting the time MPS will have to block a no-deal Brexit.

Surging fears of a disorderly departure knocked sterling as much as 1.1pc against the dollar to $1.2157, wiping out last week’s tentative gains, before regaining some ground. The currency also slipped back below the €1.10 mark against the euro, enduring one of its worst intraday drops this year.

The setback sent the pound sliding back towards the multiyear lows reached earlier this month. Foreign exchange analysts warned the pressure on sterling will now rise over the coming weeks as the countdown to Oct 31 continues. Derek Halpenny, at MUFG, said it was “only a matter of time” until sterling breaks below the 31-month low against the dollar in August.

The pound’s recent rally will “reverse pretty quickly” as the move “reinforces the perception of how serious this government is on pushing us right to the wire”, he added.

Petr Krpata, at ING, predicted that sterling will also threaten to push below a 10-year low against the euro in the build-up to October’s crucial EU summit. Mr Johnson’s move “underscores

‘Markets will not react fully until the prospect of a disorderly Brexit or a snap election is abundantly clear’

the uncertainty and the ample downside risk the pound faces over the coming weeks”, he warned.

Sterling is the worst-performing currency against the dollar and the euro in the past three months as no-deal fears have risen, shedding about 3pc of its value against its rivals. Investors braced for a surge in market volatility in the months ahead, taking out insurance against sudden moves in the pound. The currency’s two-month implied volatility, a measure tracking investors’ expectations for wild swings in the coming months, jumped to its highest level since January.

Stephen Gallo, at BMO Capital Markets, warned that markets will “not react fully” until the prospect of a disorderly Brexit or a snap election is “abundantly clear”. He said there is still a “disbelief ” among investors that “this will happen in a messy way”. Sterling could sink further next week “if it looks like we are going to have a confidence motion and elections before the end of October”, Mr Gallo added. No-deal Brexit worries also reverberated through stock and bond markets. The return on 10-year government bonds sank to 0.44pc, close to a record low.

Housebuilders were the biggest fallers on the FTSE 100 because of their exposure to the UK economy. Airlines also slipped before paring most of their early losses.

The Uk-focused FTSE 250 index closed 0.7pc lower but the blue-chip index was 0.35pc higher as prospects for its large international earners were boosted by the weak pound.