Sterling tumbled to another post-Brexit vote low against the dollar in early trading on Tuesday, as the UK government’s setting of a timetable for negotiations to leave the EU ruptured the recent stability for a currency now caught in political crosshairs.
The currency fell as much as 0.7 per cent to $1.2757, taking its decline this week to more than 1.3 per cent.
The declines accelerated after it breached $1.2796, which had been the weakest level since the EU vote in late June, and left the currency at a fresh 31-year low.
Renewed weakness for the pound follows Prime Minister Theresa May’s speech to the Conservative party conference on Sunday, which investors seized on as pointing to a so-called hard Brexit that prioritises Britain’s control of immigration policy over full access to Europe’s single markets.
“The pound’s drop is likely to be a series of spaced out depreciations, with the trigger for weakness being each piece of new information on the economic sacrifice that the UK government is willing to take on the path to Brexit,” said Koon Chow, macro and FX strategist at UBP.
Foreign-exchange strategists at Commerzbank said reduced UK access to the European single market as a consequence of limits on immigration “is likely to lead to considerable economic effects and be of notable relevance for the attractiveness of sterling investments”. They added “until an amicable agreement can be reached in this matter, sterling will therefore remain under pressure”.
The weakness in the currency has been a boon to the FTSE 100 because a lower pound strengthens the amount of revenue its constituents book from their foreign currency earnings. The main London stock index rose a further 1 per cent to 7,031.96 on Tuesday, taking it back over the 7,000-points level for the first time since June 2015.
Pearson, the textbook publisher and former owner of the Financial Times that is a big dollar earner, was the top performer, up 5 per cent. Building products group Wolseley rose 2.5 per cent as did the stock of Rolls-Royce.
The FTSE 250, London’s mid-cap index that is seen as more representative of the domestic UK economy, was up 0.7 per cent at 18,316.71.
“Despite the continued risks to the UK economic outlook, UK equities could still deliver attractive returns,” said Mike Bell, global market strategist at JPMorgan Asset Management. “That’s because over 70 per cent of UK-listed company revenues come from outside the UK. With interest rates still extremely low, UK equities offer an attractive source of income with a dividend yield that is favourable relative to most other markets.”
The UK’s benchmark 10-year gilt yield rose one basis point to 0.74 per cent. And Mr Chow cautioned that it would not be one-way travel for sterling. “The current resilience of the UK economy and the economic and political risks elsewhere, including the US elections and lingering unease over Deutsche Bank, are likely though to offer some relative succour for the pound.”