The selloff of the British pound continued this week, with the GBP/USD exchange rate hitting fresh three-month lows amid reports Prime Minister Theresa May was standing firm on her commitment to a hard Brexit.
The GBP/USD hit a session low of 1.1999 on Monday, a loss of 1.5%. The pair came off session lows, and was last down 0.9% at 1.2069.
A slumping pound helped the US dollar index rebound after three straight losses. The dollar index, a measure of the greenback against a weighted basket of six rivals, rose 0.4% to 101.56.
The pound’s slump didn’t end there. It also declined sharply against the euro, with the EUR/GBP exchange rate strengthening 0.5% to 0.8780. Sterling experienced a sharp selloff against the Japanese yen, with the GBP/JPY exchange rate plunging 1.4% to 137.633. That was the lowest level since November.
Speculative net short positions on the pound climbed to three-week highs in the week ended January 3, data from the CFTC recently showed. This suggests further downside may be in store for the currency.[1]
The pound’s recent fall comes amid expectations British Prime Minister Theresa May may stick to her pledge for a clean break from the European Union. Her stance was somewhat vindicated on Monday by London-based think tank Policy Exchange, which released a paper recommending a “clean Brexit.”[2]
Brexit secretary David Davis also wrote in The Sunday Times that the government is seeking a new trade deal with Brussels that may differ from the existing one.
“We don’t want the EU to fail, we want it to prosper politically and economically, and we need to persuade our allies that strong new partnership with the UK will help the EU to do just that,” he wrote.[3]
Mr. Davis had previously indicated his preference for continued free-trade access to the single market.
Pound sterling has been caught in a death spiral since the June 23 referendum, having declined 19% against the dollar over that period. As a result, sterling is currently trading near three-decade lows. Analysts warn for potential further downside risk is in store once the official Brexit negotiations begin. To begin that process, the British government must trigger Article 50 of the Lisbon Treaty, the formal mechanism for exiting the single market. Once the clause is triggered, London and Brussels may have two years to reach a new trade agreement.
Ms. May may implement the so-called Brexit clause by the end of March, but a surprise High Court ruling determined she would need parliamentary approval before moving forward with her plan. The government appealed the decision, which is now in the hands of the Supreme Court. A verdict is due any day.
British stocks have performed amazingly well in the aftermath of Brexit, with the FTSE 100 Index enjoying a record-setting winning streak. The export-oriented index is benefiting from a slumping pound and record monetary easing from the Bank of England (BOE), which expanded its stimulus program last August in a hedge against Brexit-induced volatility. However, a senior government official recently stated that a clean Brexit may result in a market correction, as investors contend with a prolonged period of instability.[4]
The British economy has held up in the wake of the referendum despite a worsening trade picture. Gross domestic product (GDP) expanded 0.6% in the third quarter, revised estimates from the Office for National Statistics showed last month. Consumer spending drove the expansion, offsetting the biggest drag from trade in almost three years.[5]
The BOE last year downgraded its outlook on economic growth by the most on record, citing Brexit-related risks. It has since revised those estimates to reflect slightly faster growth.
[1] Pablo Piovano (January 9, 2017). “GBP/USD tumbles to lows near 1.2180, Brexit weighs.” FXStreet.
[2] Tim Shipman (January 15, 2017). “Theresa May calls for ‘clean and hard’ Brexit.” The Australian.
[3] Christopher Hope (January 15, 2017). “Britain will ‘not take it lying down’ if UK is banned from EU markets after Brexit, says Philip Hammond.” The Telegraph.
[4] Tim Shipman (January 15, 2017). “Theresa May calls for ‘clean and hard’ Brexit.” The Australian.
[5] Irish Times (December 23, 2016). “UK third quarter GDP growth revised up.”
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