Sterling falls to eight-month low as Brexit pressures grow

Sterling fell to its lowest since early November on Thursday as investors fretted that a European Union summit would underline how there has been no meaningful progress for months in negotiations on a Brexit deal.

This lack of progress, combined with a series of corporate warnings this week about the effect on Britain’s economy if a deal is not agreed soon, has weighed heavily on sterling and lowered expectations of a Bank of England interest rate rise.

Taoiseach Leo Varadkar said on Thursday that Ireladn would have to start making preparations for the unlikely scenario of Britain crashing out of the European Union without a deal.

That drove the pound down to $1.3050, an eight-month low, before comments about interest rates seen as bullish from the Bank of England’s chief economist lifted sterling somewhat.

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EU leaders gathered in Brussels on Thursday for a summit from which the outline of a post-Brexit deal was once expected.

But Brexit has been pushed down the agenda. Investors are expecting only an update on progress on agreeing arrangements for the border between the Republic and Northern Ireland, and towards agreeing the future trading relationship between the EU and Britain.

At 1550 GMT the British currency was down 0.2 percent at $1.3089 and also down 0.4 percent against the euro at 88.44 pence.

An incoming member of the BoE's rate-setting team, Jonathan Haskel, is set to replace a relatively hawkish policymaker and this week he signalled a more dovish tone than some expected. Markets are pricing in an 84 percent chance of a single 25 basis point increase by the end of 2018.

Sliding

Sterling’s latest drop means it has tumbled more than 9 percent since a post-Brexit referendum high in April. It has been sent lower in part by a resurgent dollar but also by worries about Britain’s economy less than a year before it departs the EU.

“We have the EU summit and there is always nervousness around Brexit. There are also concerns about no interest rate hikes. That’s all adding up to the negative sentiment,” said Niels Christensen, a currencies analyst at Nordea in Copenhagen.

Nordea has a 3-month target price of $1.28 and believes further weakness is headed sterling’s way because there will be no rate rise in 2018 and because the talks with the EU over Brexit will reach a crunch point after the summer.

Britain and the EU have given themselves a deal deadline of October.

Other analysts said the market remained relatively unmoved by Brexit worries, however, because traders remained confident a last-minute deal would be reached.

“The market is only going to get really nervous a few days before the deadline. Until then I do not expect any major momentum for the sterling exchange rates from any Brexit news,” Commerzbank analysts said.

This week has seen some evidence that Brexit uncertainty is already hitting the economy, with a halving in new investment in the British car industry.

– Reuters