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Sunday 18 November 2018

Euro hits 90p: Concern over no-deal Brexit sees Sterling slump

Sterling was down against the euro, dollar and Swiss franc, suggesting the negative sentiment was broad.(Yui Mok/PA)
Sterling was down against the euro, dollar and Swiss franc, suggesting the negative sentiment was broad.(Yui Mok/PA)

Ciaran Moran and Tom Finn

Sterling has slumped half a percent against the euro to below 90 pence, its weakest since the middle of November in a selloff fueled by investor concern that Britain will crash out of the European Union without a trade deal..

London-based traders said investors had moved to hedge against the currency’s going into free fall if Britain drops out of the EU with no deal in less than eight months’ time.

Sterling was down against the euro, dollar and Swiss franc, suggesting the negative sentiment was broad. Three-month sterling volatility rose to its highest since March.

Analysts said the pound was also hurt by a growing realisation, after the Bank of England’s monetary policy meeting last week, that interest rate increases were likely to be as limited as one a year and contingent on a smooth Brexit.

Investors appear to view a no-deal Brexit as a growing possibility, especially after Britain’s Trade Minister Liam Fox suggested over the weekend that the likelihood of a no-deal outcome is as high as 60pc.

The Irish Farmers' Association (IFA) has said that its members are concerned about the lack of progress and clarity on what the outcome of the UK's withdrawal from the European Union next year will be.

Amid mounting fears that talks are continuing with no substantial progress, raising fears of a no-deal Brexit, farmers here have called on the Government to hold the EU to its promises that the impact on agriculture in Ireland would be minimised.

"The task for the Taoiseach and the Government is to hold the EU to its position and guarantee that Irish farmers are not exposed in the final outcome," a spokesman for the IFA said recently.

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"The UK is our best market and we do not want to see trade disrupted, either by value or volume.

"In the event of further sterling devaluation, the IFA will seek direct income aid support to Irish farmers on the basis that even a small fall in sterling to 90p could wipe out producer margins."

According to Christophe Barraud, an economist at Market Securities brokerage in Paris a lot of companies can’t wait for the [Brexit] negotiations outcome in October, so of course are trying to hedge against a drop in the pound.

The BoE raised interest rates from crisis-era lows last week but the pound didn’t benefit. Few saw the increase as a vote of confidence in the economy with so much political uncertainty ahead.

“Some are thinking in the market that the BoE raised in order to given them ammunition to cut rates in the face of a no- deal [Brexit],” said Neil Jones, head of hedge fund FX sales at Mizuho Bank. “The next move [by the central bank] could be a cut rather than another hike...”

Recent gains by the euro and the dollar have also hurt the pound.

British Prime Minister Theresa May will discuss Brexit with the EU’s 27 other leaders at an informal summit in Austria next month and meet with EU leaders again in October to try to seal deals on the terms of Britain’s withdrawal.

“We remain bearish on the pound in the short term until the Brexit mess is out the way and look for the currency to enter a $1.27-1.28 range before the leaders’ summit in September,” said Nomura strategist Jordan Rochester.

The pound has fallen more than 10pc since mid-April versus the dollar.

Traders are now preparing for Friday’s reading of second-quarter British economic growth numbers to give the pound some possible relief.

Reuters

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