Pound hits five-month low as Boris steps closer
Markets preparing for hard Brexit
STERLING eked out some gains against a plunging euro on Tuesday although it remains close to lows not seen since January as the market is now starting to price in a "hard Brexit" under likely new Conservative Prime Minister Boris Johnson.
The second round of the party voting on Tuesday saw Johnson again top the poll of Conservative MPs, as expected, with Jeremy Hunt a distant second.
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Johnson also appears to have built an even stronger lead among Conservative Party members, according to a poll by ConservativeHome which showed a record high 55pc of members wanted him as party leader. He was followed by Rory Stewart on 16pc while all of the other contenders trail on single-digit tallies.
"Sterling is now starting to price-in a potential hard Brexit with Boris Johnson seemingly having the keys to No.10 Downing Street. Johnson has made it clear that he wants the UK to leave the EU on October 31 with or without a deal," said Nick Cawley an analyst at DailyFX.
The pound initially traded sharply lower on Tuesday, hitting its weakest level in five months against the euro at 89.66p, in part due to media reports that Chancellor of the Exchequer Philip Hammond had threatened to quit the government. But it gained ground against a sinking euro which suffered when European Central Bank President Mario Draghi indicated the ECB was ready to cut interest rates and resume bond buying.
A weaker pound could spell trouble for tourism-related stocks here, like Ryanair, or shipping companies such as Irish Continental, although it has translated into weaker than expected inflation in Ireland due to the lower cost of goods imported from the UK. And there are few signs yet that Brexit concerns have spilled over into weaker demand for Irish exports.
Any gains, however, will be shortlived if a hard Brexit does occur, with the Central Bank of Ireland estimating there will be a 4 percentage point hit to growth in the first year after Brexit alone.
A hard Brexit will also complicate the budget process here as the government is due to submit its spending plans in the middle of October, just two weeks before the October 31 deadline set by the European Union for talks to be concluded.
"Irish exporters will likely have to deal with a structurally weaker sterling as the UK's 'safehaven' status has long gone the way of its AAA rating," said Investec Chief Economist Philip O'Sullivan.
There is still, however, an upside.
"Ireland could continue to win big from the relocation of operations out of the UK e.g. certain financial services," he said, noting that Ireland's openness to skilled migrants was also a plus as the UK will tighten its restrictions on who is allowed to work there.