Sterling trades close to record low on ‘hard Brexit’ concerns

Sterling traded close to a record low in trade-weighted terms on Thursday, kept under heavy pressure by worries that Britain will undergo a “hard Brexit” that will sever ties with Europe’s single market.

Lawyers leading a bid to force the UK government to seek parliamentary approval before formally starting the process that will take Britain out of the EU told the High Court on Thursday that the June 23rd referendum had no constitutional foundation, and was merely “advisory”.

The case, which government ministers have called an attempt to subvert the democratic process, had little impact on the pound on Thursday. A final decision is not expected for some weeks, as whichever side loses is likely to appeal.

Traders said that as both the timing and the outcome of the hearing were so unclear, investors – who dislike political uncertainty – would steer clear of the pound.

"If the court decides that parliament should be allowed to vote, sterling could rally on speculation that MPs may vote against triggering article 50," said Charalambos Pissouros, senior analyst at IronFX Global, referring to the formal trigger for the Brexit process which prime minister Theresa May has said will come by the end of March.

Leg lower

“On the other hand, should the court rule that the government can proceed alone this could be the trigger for the next leg lower in sterling.”

The pound traded up 0.1 per cent on the day at $1.2224 and down 0.2 per cent against the euro at 90.36 pence .

Most investors would prefer a “soft” Brexit scenario in which Britain keeps in or close to the EU’s single market and retains many trade and business benefits, and so are sensitive to any signs that the process is moving in the opposite direction.

The pound has sold off sharply in the last two weeks on concerns the government will negotiate for an exit that favours tighter immigration controls over free trade, thereby hurting the foreign investment needed to fund Britain’s huge current account deficit.

Parity

Mohamed El-Erian, chief economic adviser of

Allianz

, said on Wednesday the possibility of sterling hitting parity with the dollar should not be ruled out.

Sterling has shed 18 per cent against the dollar since Britain’s shock vote in June to leave the EU. Year-to-date it is the second worst performing currency of 30-plus tracked by Thomson Reuters Datastream, according to Reuters graphics.

In a signal that the slide may be starting to push up inflation and hurt consumer spending, Britain's biggest retailer Tesco has pulled top-selling Unilever products from its website in a row over pricing.

"The current situation is anything but stable and another slide [in the pound] would feed concerns far more than it would help the UK's competitive position," said Kit Juckes, macro strategist at Société Générale. "And so it's worth remaining short ." – Reuters