British pound sinks to lowest level since 1985

Sterling has fallen to its lowest level since 1985, as Brexit plans advance.

The British pound has slumped against the US dollar.

The pound fell to a three-decade low against the dollar on Tuesday, trading below the levels it hit after Britain voted to leave the European Union in June and spurring predictions of further volatility.

The currency fell by more than 0.8 per cent down to a low of $US1.2736 reaching almost 15 per cent below where it traded on June 23, the day the UK went to the polls. The pound was trading down against the euro at €1.1409, at its lowest level since 2013.

The latest stage in the pound’s decline came after UK Prime Minister Theresa May set a March date to begin exiting the EU and said full access to the country’s largest trading partner was a lower priority than controlling immigration.

Sterling has barely risen above $US1.34 since the referendum, as investors fret about the effects of Brexit on the British economy and the likelihood of further Bank of England action to support growth.

But on an upside-down day for British markets, the country’s leading share index, the FTSE 100, headed toward a record high, as investors saw the benefits of a weaker currency for the benchmark’s companies, which make over 70 per cent of their profits abroad. The FTSE 100 was up 1.90 per cent at 7,116.

Currency strategists expect further volatility in sterling as London and Brussels negotiate the terms of Britain’s exit.

“If you’re going to go for a form of Brexit that completely undermines the industry in which you’ve got a comparative advantage — financial services — that is going to undermine that current account and weaken sterling even further” said Grant Lewis, head of research at Daiwa Capital Markets Europe.

The beleaguered pound is now one of the worst-performing major currencies against the dollar. Most of currencies of the Group of Ten industrial economies, the 10 most commonly traded in foreign exchange markets, are up against the greenback this year. The British pound is down 13.4 per cent against the dollar, more even that the battered Mexican peso, which has fallen 10.4 per cent on the back of concerns over the outcome of the US presidential election.

Analysts and politicians continue to debate the effects of the weaker pound on the British economy.

Economic data in the months following Brexit has mainly beat expectations. The pound’s weakness is one reason why, as British exports become more competitive. On Monday, the September purchasing managers index for manufacturing came in at 55.4, its highest level in two years. Any reading above 50 indicates that a sector is growing.

But many analysts believe that the good run of data won’t last, exposing the pound to further weakness.

“The recovery in several gauges of sentiment and activity after the immediate shock has prevented more material declines, but in our view it is only a matter of time before less positive data starts to appear,” said John Wraith, head of U.K rates strategy at UBS.

The effect of the weak pound has also sent inflation higher, particularly in the sectors of the of the economy most exposed to currency shifts, such as fuels and materials. Overall import prices rose 9.3 per cent year-over-year.

Higher inflation could make it harder for the Bank of England to support the economy going forward, with further rate cuts and stimulus, while making life more expensive for the British.

Meanwhile, the pound’s fall means that the FTSE’s rally higher hasn’t been all good news for investors abroad. The FTSE is up by 12 per cent since the June 23 referendum, but the decline in sterling means the index is still down by 2.9 per cent in US dollar terms over the same period. The S&P 500 is up over 2.3 per cent.

But with investors increasingly turning to the positions that the UK and EU are staking out ahead of next year’s Brexit negotiations, focus is likely to shift away from shorter-term economic data, some analysts say.

The pound’s recent stumble was sparked on Sunday, when Mrs. May said in a speech at her Conservative Party’s annual conference that regaining control of immigration policy was a non-negotiable priority. That puts her at odds with EU counterparts, who have frequently said that Britain must allow freedom of movement to EU citizens if it wishes to keep access to the common market.

A Downing Street spokeswoman declined to comment on sterling’s fall.

“I’m struck that we’re now pricing sterling more off the 12-24 month outlook for politics, so the fact that the PMIs are a little bit better doesn’t matter so much,” said Kit Juckes, global head of foreign exchange strategy at Société Générale SA.

Many UK politicians who had supported Brexit were sanguine about sterling’s fall on Tuesday.

Graham Brady, a Conservative politician, said there will be short-term reactions to the vote but sterling would stabilise over the longer term.

“Over a period of time, we will see currency fluctuations against the dollar and the euro, and in due course thepound will settle at an appropriate level,” he said from the Conservative party conference in Birmingham.

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