The pound resumed its post-Brexit decline after a two-day rally, dropping more than 1 per cent after Bank of England governor Mark Carney announced likely monetary easing over the summer.
Telling journalists that the BoE’s objectives included some “ruthless truth-telling” about the economic consequences of Brexit, Mr Carney said the big moves in sterling in the 48 trading hours following the referendum outcome had been expected.
“There was a need for the currency to find a new level,” he told reporters after delivering a speech at the Bank.
The effect of his speech was a 1.6 per cent drop in the pound to $1.3211, taking a sizeable bite out of the midweek rally of 3 per cent.
The pound set a 31-year low of $1.3118 on Monday, and analysts expect it is only a matter of time before it finds a lower level. A range of $1.20 to $1.25 is favoured by several analysts.
Mr Carney said sterling’s sharp fall meant any boost to net trade would be damped by uncertainty around future trading relationships.
“A lower exchange rate will also entail higher prices for imported consumer goods, energy and capital goods, and consequently lower real incomes,” said the governor.
As the UK continued to be roiled by political turmoil, Mr Carney said the deterioration in the economic outlook meant “some monetary policy easing will probably be required over the summer”.
Jane Foley, FX G10 strategist at Rabobank, said: “Carney was a pioneer of the forward guidance movement and he didn’t hold back in his warnings that further easing will probably take place this summer.
“While Carney’s speech is designed to reassure investors that the BoE and banks are prepared for the shock that may await them, his words may also have the effect of driving home to the UK electorate the economic risks that it has brought upon itself.”
Derek Halpenny, FX strategist at MUFG, said that after weakening economic momentum at the start of the second quarter, Brexit’s impact in the third quarter would see falls in a number of indicators, including personal consumption, business investment and housing.
In the long term, analysts expect a bottom will form in sterling as markets adjust to a new reality, but Brexit was likely to cause a sterling correction to around $1.25.
“However, we find it difficult to argue that Brexit will eventually lead to GBP/USD falling below 1.2000 or certainly below 1.1000,” Mr Halpenny said.
Ms Foley added that further signs of pressure on the pound would come from the UK’s current account deficit, which data revealed was 6.9 per cent of GDP in the first quarter.
Although below the 7.2 per cent of the previous quarter, “it is still a huge deficit and a reminder of the vulnerability of the pound to the whims of capital flows”, she said.
“We see risk of GBP falling further in the coming months as the reality of the political uncertainty undermines economic growth.” She is targeting $1.23 for sterling by the end of the year.