Pound falls on back of Brexit worries

The pound fell by as much as 1 per cent versus the dollar on Monday, as doubts intensified over Prime Minister Theresa May's ability to win parliamentary support for a Brexit deal she is trying to negotiate with the EU.

While broad strength in the US currency was steepening the pound’s drop, sterling was also weaker against the euro in a sign that concern over the risk of the UK falling out of the EU next March without a deal was souring sentiment.

It rebounded from its lows after reports that Michel Barnier, the EU’s chief negotiator with the UK on the terms of separation, said the main elements of an exit treaty text were ready to go before the cabinet in London.

Risk

“For the pound it’s all about Brexit. You come in this morning and there appears to be no progress,” said Derek Halpenny, European head of markets research at MUFG.

Brexit: Summit hopes fade as Barnier says no Border breakthrough

---

Brexit: Varadkar sets out second condition for review of backstop

---

The Irish Times view on Brexit talks: When backstop means backstop

---

May tells cabinet she will not agree Brexit deal ‘at any cost’

---

Currency traders have been reluctant to trade the pound too aggressively given the level of political noise over Brexit, and the risk that the currency will move violently depending on whether there is a deal or not. As a result, sterling has been stuck in a range of between $1.26 and $1.32 since August.

However, the resignation late on Friday of Jo Johnson, a pro-European transport minister, has underlined that the deal Mrs May is trying to strike in Brussels faces opposition not just from Brexiteers, but from conservative MPs who in 2016 voted for the UK to remain in the EU.

“It’s not that it’s all over after this week, but if there isn’t an agreement (with the EU), the market will be much more aggressive in pricing in a no deal,” Mr Halpenny said.

Sterling was down by as much as 1.2 per cent against the dollar to a day-low of $1.2825, the lowest in more than a week. It recovered from the worst of its losses as the session continued, to stand at $1.2910, down 0.5 per cent.

It also rebounded against the euro, to strengthen by 0.2 per cent for the day, with 87.17p required to buy one euro. Before the reports of Mr Barnier’s remarks, it was weaker by the same margin.

Although the relative resilience of the UK economy, and rate rises from the Bank of England, have supported sterling in 2018, strategists say the outcome of the Brexit negotiations is now dominating the outlook for the currency.

“UK politics remains poisoned,” said Mikael Olai Milhøj, senior analyst at Danske Bank. “[Mrs May] is under pressure, not only from hardliners but also increasingly from moderate, pro-EU Conservatives. Our base case is still that the EU and the UK will reach an agreement in December but that negotiations may slip into early January. We still expect a decent Brexit but think no one should rule out a ‘no deal’.”

The uncertainty drew investors into UK government debt, taking yields on benchmark 10-year gilts down 5 basis points on the day to 1.442 per cent, its lowest since the end of October.

Yields

“Today’s greater drop in gilt yields does in part reflect more Brexit angst,” said Howard Cunningham, fixed income portfolio manager at Newton Investment Management.

“In the longer term, whether gilt yields stay lower in the event of hard Brexit will be determined by the future path of inflation, and the response of the Bank of England, as well as the appetite of overseas investors to continue to invest in UK government debt.”

As has been the case since the referendum, the weaker pound buoyed the UK stock market. The FTSE 100 was down 0.4 per cent in afternoon trade, as those blue-chip companies with earnings in dollars benefited. The Europe-wide Stoxx 600 was weaker by 0.6 per cent,

Sterling’s ability to hold the $1.30 level has looked dependent on investors’ confidence in the prospects of a Brexit deal being struck.

Roger Hallam, currency chief investment officer at JPMorgan Asset Management, said: “Short term we continue to trade around extremes in sentiment, given the highly uncertain path ahead, but with a greater willingness to buy into the pound when Brexit sentiment becomes very pessimistic.”

– Copyright The Financial Times Limited 2018