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Categorized | Currencies

Pound’s fall is a reality check for May


Posted on October 4, 2016

The face of Queen Elizabeth II is seen on rolled ten, twenty, and fifty pound sterling banknotes in this arranged photograph taken in London, U.K., on Thursday, March 6, 2014. The pound was 0.5 percent from the strongest level in four years against the dollar after the Bank of England announced it would keep interest rates at a record low this month. Photographer: Simon Dawson/Bloomberg©Bloomberg

There is a conspiracy theory that Donald Trump is trying to throw the US presidential election. How else to explain his car-crash performance at the first debate?

Here is another one about Theresa May: she is deliberately talking down the pound, or at least letting it fall.

    The summer has been a phoney war over sterling, with fears over Brexit counteracted by surprisingly good data. On Sunday, the UK prime minister broke cover and ended the stalemate with a speech to the Conservative party conference that laid out the timing and process of the Brexit negotiations.

    Sterling’s subsequent plunge should not have come as a surprise. The market has been fretting about the date when the UK would trigger Article 50 notification, starting the two-year countdown for officially leaving the bloc. Some have even assumed it would never happen.

    The conference speech was evidently a key set-piece moment for Mrs May. Further vacillation on the issue would have frayed fragile investor confidence and tested the patience of the EU to the limit. So she set an end of March deadline.

    Better to live with a sharply weaker pound now than have a drip-feed of weakening sterling, the theory goes.

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    Why does that matter? Decades in politics will have taught Mrs May the value of timing. Triggering Article 50 right after the vote would have continued the post-referendum slide of the pound, crushing confidence. Either by luck or by judicious monetary policy, the summer delivered a calmer market, free-spending tourists and foreign investors who kept faith with the UK.

    This week, standing in front of her party, was her moment to shore up her rightwing credentials with a “hard Brexit” tone, and to let sterling fall again. The side benefits are record FTSE 100 and 250 highs: good news for the pension pots of the party faithful as well as the competitiveness of UK exporters.

    But there are only so many times you can talk up the benefits of a falling currency, particularly if it leads to rising input prices and depleted consumer spending power, and investors pulling projects and jobs from the UK.

    That should be Mrs May’s reality check. For those investors who had been clinging on to the belief that Brexit would never happen, her speech this week was theirs.

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    roger.blitz@ft.com