Sterling drops to 31-year low on ‘hard Brexit’

Sterling fell to a 31-year low on Thursday on fears of a “hard” exit by Britain from the European Union and Prime Minister Theresa May’s comments on the impact of loose monetary policy which some saw as a thinly veiled attack on the Bank of England.
May, in a speech to Conservative Party delegates, raised the issue of the side effects of ultra-low interest rates and money-printing.
Although her spokesman later played down suggestions that she was signalling changes ahead in monetary policy, it led to speculation the government was against further interest rate cuts, given the adverse impact on savings and pensions. As a result, gilts came under pressure, with the 10-year yield jumping to its highest since mid-Sept.
Some saw her comments as unusually blunt and an attack on the Bank of England’s (BoE) independence, raising more uncertainty for the currency, which has been under pressure for months.
“In our view, this suggests that once (BoE chief) Mark Carney’s term is finished at the BoE, he may be replaced by someone more hawkish on policy,” IronFX Global senior analyst Charalambos Pissouros said.
“Although this could be seen as a relatively bullish signal for sterling, traders are currently more concerned with political risks and the possibility of a ‘hard Brexit’ rather than monetary policy or economic data.”
Carney, who was appointed in 2012 for five years, has been criticized by some political figures who said he tried to frighten the electorate into voting to stay in the European Union in a referendum held on June 23.
SEB currency strategist Richard Falkenhall said May’s comments should be seen in the light of recent criticism by politicians of ultra-easy policies by central banks. In the US Republican presidential candidate Donald Trump has accused the Federal Reserve of keeping interest rates low because of political pressure from the Obama administration.
“Central banks have been independent in most Western economies for a few decades now but we are seeing a shift in politicians’ views of late. We have to take May’s comments in that perspective,” Falkenhall said.
Sterling fell 1 percent to $1.2622, with a Reuters poll released on Thursday showing more losses are in store. The currency has lost 2.5 percent this week, hurt by May’s announcement on Sunday that the formal process to take Britain out of the EU will start by the end of March.
The euro hit a five-year high while sterling’s trade-weighted index was stuck near lows last seen in early 2009.

HARD EXIT

Many economists and investors think May’s government is leaning toward a “hard Brexit” option where Britain gives up full access to the single market in order to impose full control on its borders. Some fear that could hinder trade and constrict the foreign investment needed to fund Britain’s huge current account deficit, one of the biggest in the developed world.
Economic activity has held up better than many had expected since the June vote to quit the EU, but many policymakers are anxious about the prospects for future investment. Subdued investments are likely to hit growth and lead to job losses.
A report on Tuesday commissioned by consultancy firm Oliver Wyman said Britain’s financial industry could lose up to 38 billion pounds in revenue if the deal leaves it with restricted access to the EU single market.
“May has pushed her party way across the center ground, taking issue with self-serving individuals and businesses and appealing to the non-metropolitan voter,” ING’s head of currency strategy Chris Turner said.
“That does not bode well for financial services in Brexit discussions. While the euro/sterling could correct lower ... a dip to 87.35/50 looks a buy.”

Source: Arab News