Sterling to slide further as political crisis grips Britain after 'Leave' vote
Sterling is poised to plunge further, traders have warned, testing new lows against the dollar after the fall-out from last Thursday’s referendum sent shockwaves through the British political system.
A weak pound will heap pressure on Irish exporters, whose costs are in euro and who lose competitiveness selling into the UK when the currencies diverge.
“The UK’s natural inclination over the past century has been to let the pound take the strain during times of crisis,” said Simon Derrick, chief currency strategist at Bank of New York Mellon in London.
That probably means more pound weakness this week, he said.
The pound tumbled 8.1pc to $1.3679 on Friday, the biggest drop on record and almost double the 4.1pc decline on Black Wednesday in 1992.
That drop may be just half-way to finding a new level against the US dollar, now restored to its historic status as the world’s safe haven in a time of crisis.
“People are finding it difficult to comprehend what Brexit implies for the future – we don’t know yet what the magnitude of the shock will be,” said Steven Barrow, head of Group-of-10 strategy at Standard Bank in London. “So far, in terms of sterling-dollar, we’ve seen half the decline we’re likely to see this year.”
Middle Eastern stocks that traded through the weekend suffered sharp declines, a sign that investors have yet to be reassured that Friday’s massive market falls had fully priced in the new post-referendum reality and a pointer to the likely trend when Europe opens for business today.
Dubai’s DFM General Index lost 3.3pc, the most since January, as Emaar Properties PJSC tumbled 4.7pc.
Global markets buckled and about $3 trillion was lost from equity values on Friday following the UK referendum result.
Investors now face months of uncertainty while the mechanics and terms of the UK’s exit from the European Union are worked through.
But the prospect of an orderly withdrawal process was thrown into doubt over the weekend. Moves by the Scottish first minister Nicola Sturgeon to break with England after the vote appear to throw Britain’s own political settlement into doubt, while the two main English political parties, Labour and the Conservative Party, are each riven by increasingly public internal squabbles.
The confusion leaves the outlook for the currency murkier than ever.
“From here, a 10pc fall relative to the US dollar seems about right,” Kit Juckes, a London-based strategist at Societe Generale told Bloomberg Television yesterday.
“The low point will be somewhere between $1.20 and $1.25. However much you want to say the UK will survive and calm down, the uncertainty is going to have an economic impact, and the uncertainty is magnified at the beginning by the politics.”
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While shares fell after the UK vote, the biggest shockwaves have been on currency markets, where sterling and the euro are both weaker.
“There’s a lot of questions that need to be answered right now – the longer this takes the more the pressure is going to be on the pound,” Vasileios Gkionakis, head of currency strategy at UniCredit in London said.
“What we haven’t really seen is the flow, the reversal of flows coming out of the UK. When these start unwinding I’m pretty sure that we’re going to see some enormous pressure on the pound,” he said. (Additional reporting Bloomberg)