Sterling looks more vulnerable by the day

As Theresa May’s domestic political problems grow and the Brexit mire deepens, sterling is looking vulnerable. Against the euro, the UK currency was back around 89p on Monday, a fall of around 0.7 per cent from Friday’s close, as markets struggle with the political uncertainty in London and what it might mean.

Tensions

Weekend reports – as yet unconfirmed – that a group of 40 Conservative MPs had signed a letter of no confidence in the prime minister have added to an already unsettled political atmosphere, centred on cabinet tensions over the Brexit talks. The EU Withdrawal Bill returns to the UK parliament on Tuesday with a host of amendments tabled and an uncertain passage.

The next few weeks could see volatile currency trading, with the EU's chief negotiator, Michel Barnier, saying last week that Britain had a fortnight to improve its offer in key areas to allow EU leaders to give the green light at the December summit for the talks to progress to the next stage. With difficulties in all three key areas – the bill Britain must pay to leave, Irish issues centred on the Border and mutual citizens' rights – doubts are growing about whether a deal is possible in December and, if not, what it will mean for the talks.

Market analysts believe that sterling is likely to swing in tandem with the political mood and developments in the talks, and is vulnerable in particular if fears increase of “no deal” Brexit.

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Brexit supporters in Theresa May's government, including foreign secretary Boris Johnson and environment secretary Michael Gove, have urged her to prepare for a hard Brexit and Barnier has said that the EU is also making its own preparations for this.

Exports

Sterling is now moving back into dangerous territory for Irish exports. A Bord Bia survey showed at almost four out of 10 food exporters started to feel the squeeze at a rate of over 89p to the euro, rising to eight in 10 at 94p. A separate study by IBEC indicated that the pressure starts to come on indigenous exporters at a rate of over 85p and that sterling at 90p or over creates real difficulties. Some 40 per cent of food exports go to the UK market.

Weakening sterling also encourages cross Border shopping, adding to pressure on the retail sector. In particular there has been a sharp rise in used car imports from the UK, up almost one third over last year’s levels and a fall-off in Irish new car sales.

Having initially fallen in the wake of the Brexit vote, sterling has been generally well under 90p to the euro over the past year, expect for a period of severe weakness, which saw it rise to 93p in August. However the latest fall has moved it back into the danger zone for Ireland.