Sunday 18 August 2019

Sterling slides as hopes of Tory-Labour Brexit pact fade

Out the door: Theresa May’s Conservative Party is likely to suffer large losses in the upcoming European elections. Photo: Bloomberg
Out the door: Theresa May’s Conservative Party is likely to suffer large losses in the upcoming European elections. Photo: Bloomberg

David Chance

Last week's optimism that Britain's Conservative government and the opposition Labour Party would strike a Brexit deal that would leave the UK's trading relationship with the European Union largely intact finally evaporated on Tuesday, dragging the pound lower after it had staged a big rally.

By mid-afternoon yesterday, one euro was worth 86.11 pence, a six-day low for the pound, after it opened trading on Wednesday with one euro worth 85.59 pence and investors sentiment turned amid rising speculation over the future of Prime Minister Theresa May.

Mrs May's government confirmed on Wednesday that Britain would take part in European elections this month, a move that will likely see large losses by the Conservatives after they took a hammering in last week's local government elections in which they lost 1,300 seats.

Losses by both of the major parties to pro-remain groups such as the Liberal Democrats and the Greens on one side and to Ukip among voters critical of delays to the Brexit process initially added new impetus to negotiations between Mrs May's embattled Conservative Party and Labour.

As the prospects of a deal finally faded on Wednesday, potential challengers to Mrs May's leadership started to emerge from Conservative Party ranks.

Mrs May stuck to her line that she would resign as leader once Brexit had been pushed through in the face of questions from her own MPs in Westminster, but the prospect of hefty losses in the EU elections could precipitate a rebellion, opening the way for hard-line Brexiteers like Boris Johnson.

"As such, with the risks of PM May being replaced rising, pressure remains on the downside for the pound and given that the most likely alternatives according to betting markets are potentially a harder Brexiteer than PM May upside seems limited for the pound," Justin McQueen, a market analyst for trading and analysis firm DailyFX wrote. Economists expect that data on Friday will show the UK economy expanded by 0.5pc in the first quarter, sharply higher than the 0.2pc expansion in the fourth quarter of last year, due to the threat of a "Hard Brexit" which meant that companies dragged forward activity into the quarter.

"If some activity was indeed brought into Q1 from Q2, then manufacturers won't need to produce as much to meet demand in Q2," economic consultancy Capital Economics said in a preview of the data.

That means that growth in the second quarter will likely come in at a meagre 0.2pc, it said.

The uncertainty over Brexit has made assessments of the health of the UK economy more difficult and also complicated the interest rate strategy of the Bank of England.

"Looking through the near-term bumps, though, by expecting GDP to rise by 1.5pc this year, by 1.7pc next year and by 2.2pc in 2021 we are still more upbeat than most on the outlook for the economy," added Capital Economics.

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