Sterling treads water against euro as Brexit talks continue

UK currency under intense pressure amid signs Brexit is undermining economy

Sterling hovered close to 92p against the euro on Wednesday, just above an eight-year low, and more than 20 per cent below its pre-Brexit value, as investors looked for signs of progress in the ongoing Brexit talks.

The latest swing against sterling has prompted predictions that the UK currency may now be heading towards parity with the euro, a scenario that industry bodies here claim will drive many Irish exporters out of business.

"We are staying away from sterling for now, as it remains a headline-driven currency even though on a valuation basis it looks attractive," Thomas Flury, global head of currency strategy at UBS Group, said.

Investors focused on the third round of Brexit negotiations, which started in Brussels on Monday, with the European Union’s chief negotiator, Michel Barnier, saying he was concerned at the slow progress of the talks.

The British government has published a series of position papers that have outlined compromises over some of the issues likely to block progress in talks this year, but EU officials say the UK needs to settle its divorce bill with the bloc before a trade agreement can be discussed.

Morgan Stanley strategists said sterling will likely weaken further against the euro until the British political conference season, in October, when investors will be watching for any disagreements within the ruling Conservative Party.

British companies says Brexit is already hurting

An industry survey meanwhile showed on Wednesday that the UK’s planned departure from the EU has already hurt about 40 per cent of small and medium-sized British manufacturers.

The quarterly National Manufacturing Barometer, conducted by the business consultancies SWMAS and Economic Growth Solutions, chimed with other surveys showing robust manufacturing activity but nervousness about the future.

Although 45 per cent of small- and medium-sized manufacturers expected profits to improve over the next six months, a similar proportion thought business conditions will deteriorate once the UK leaves the European Union.

"SME manufacturers are sending a clear message to government. The vast majority want to see free trade with the EU maintained, to help minimise the cost of imports and keep red tape to a minimum," said Simon Howes, chief executive of the Exelin Group, which owns SWMAS.

“Some manufacturers are already seeing the cost of materials rise due to recent falls in the value of sterling against the euro and uncertainty over the future of the UK’s trade arrangements with the EU.”

The survey showed that 41 per cent of manufacturers thought the Brexit process had already harmed their business.

Half of the respondents cited a free-trade agreement with the European Union as their top priority. Earlier this month the UK outlined plans for a future customs agreement with the EU and an interim deal to ease companies’ Brexit concerns. One senior EU official described such proposals as fantasy.

Additional reporting by Reuters

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times