Sterling slumps to new three-year low against euro

Sterling slid to a three-year low against the euro on Monday after prime minister Theresa May set a March deadline for the formal departure process from the EU to begin, sending British shares to a 16-month high.

She told her Conservative Party’s annual conference on Sunday that she was determined to move on with the process and win the “right deal”, in a move to ease fears inside the party that she may delay the divorce.

Mrs May said she will invoke Article 50 no later than the end of March next year, referring to the EU’s Lisbon Treaty that formally puts the divorce proceedings between the EU and Britain in place.

While the March deadline offers some clarity to the divorce process and underpinned stocks, many in the market worry that the government’s stance points to a so-called “hard Brexit” that would see the UK left outside the single market in favour of strict controls on migration.

While the economy has been rather resilient post-referendum, fears of a slowdown in business investment and the wider economy will undermine the pound, and the focus turns to possible further monetary easing by the Bank of England (BoE) in the coming months.

Sterling fell 1 per cent to $1.2845, its weakest since early July and not far from the 31-year low of $1.2798 struck on July 6, just days after the June 23rd referendum on EU membership. It hit a three-year low against the euro.

“What will weaken sterling is if markets assign a higher probability to a ‘hard Brexit’,” said Hans Redeker, head of currency strategy at Morgan Stanley. Investors worry that a “hard exit” from Europe’s single market will drag Britain into a recession and blow out its ballooning current account deficit, already among the highest in the developed world. A wider current account deficit and slowing foreign investments tends to lead to a lower currency.

Factory activity

For now, though, sterling’s weakness was helping British exports and the economy. Data released on Monday showed factory activity grew at the fastest rate in more than two years last month. September’s factory PMI exceeded all forecasts in a Reuters poll of 28 economists, and suggested manufacturing growth in the third quarter will be the strongest so far this year.

Britain’s blue chip FTSE 100 index rose 1 per cent hitting its highest level since June 2015, with expectations of further easing by the BoE also boosting sentiment. The index had fallen sharply after the June vote, but has since recovered and is up nearly 10 per cent, thanks to the large number of internationally facing firms listed that have benefited from a fall in sterling.

“As a result of prime minister May’s announcement . . . the pound has weakened significantly, which is actually seen as a good thing by the FTSE 100 as it’s quite an export-heavy index,” said Henry Croft, a research analyst at Accendo Markets. British government bond prices rose, while expectations that the BoE could ease policy in February improved marginally, pricing in the interest rate swap market showed.

– (Reuters)