Sterling skids to three-month low as “hard Brexit” fears bite

Sterling skids to its lowest levels – bar a “flash crash” in October – in 32 years on Monday, hit by fears that Prime Minister Theresa May will say on Tuesday that Britain is set for a “hard” Brexit out of the EU and its single market.

LONDON, ENGLAND UK (BANK OF ENGLAND) – Sterling skidded to its lowest levels – bar a “flash crash” in October – in 32 years on Monday (January 16), hit by fears that Prime Minister Theresa May will say on Tuesday that Britain is set for a “hard” Brexit out of the EU and its single market.

Sterling fell as much as 1.5 percent against the dollar and over 2 percent against the yen. That shifted the spotlight away from the greenback, which has come under pressure in recent days as investors ponder U.S. President-elect Donald Trump’s likely economic policies after he takes office on Friday.

The pound plunged to as low as $1.1983 in early trade in Asia, depths not seen since a bout of thin liquidity triggered a “flash crash” on Oct. 7 that wiped as much as 10 percent off the pound in a matter of minutes.

By 0851 GMT sterling had managed to inch back above $1.20 but still traded down 1.1 percent on the day at $1.2040.

Dealers said the market was reacting to various media reports over the weekend, including one in The Sunday Times that said May will signal plans for a “hard” Brexit in her speech on Tuesday, saying she’s willing to quit the European Union’s single market to regain control of Britain’s borders.

Investors have been worried such a decisive break from the single market would hurt British exports and drive foreign investment out of the country.

“Pound sterling is very much focal in that and indeed we have over the weekend seen the pound trade towards the flash crash lows of October. And the contents of PM Theresa May’s forthcoming speech apparently are being quite widely leaked which would perhaps underline that, in fact, the UK is heading for a hard Brexit scenario. And, of course, there is a political dimension to this as well. It’s likely that the rhetoric between the negotiators on both sides of the fence is going to get quite nasty quite soon,” said Mike Ingram, Market Analyst, BGC Partners.

May has said she will trigger Article 50 – starting the formal withdrawal from the EU – by the end of March. But so far, she has revealed few details about what kind of deal she will seek, frustrating some investors, businesses and lawmakers.

“The narrative on Brexit at the moment is of a hard Brexit, isn’t it? It’s increasingly clear that the UK is unlikely to retain access to the European single market. That being the case, we could well be out in the cold, and the battle lines are starting to be drawn. Within the last 24 hours, of course, we’ve had Chancellor Philip Hammond saying that the UK would not lie down in the event of the UK being denied single market access, raising the prospect of possibly rock-bottom tax rates, corporate tax rates, deregulation, and as actually (opposition leader) Jeremy Corbyn perhaps raised the spectre of, effectively a trade war with the rest of the European Union.”

The euro climbed almost 1.5 percent against the pound to a two-month high of 88.53 pence, while sterling fell as much as 2.3 percent on the perceived safe-haven yen to a two-month low or 136.48 yen.

The Japanese currency gained broadly as a risk-off mood dominated, hitting a six-week high of 113.61 yen to the U.S. dollar.

The dollar index climbed 0.4 percent to 101.59.

Trump revealed few policy clues at his first press conference last week since his November election victory. The dollar rose after the election on expectations that his administration would embark on stimulus to boost growth and inflation, prompting the U.S. Federal Reserve to adopt a faster pace of interest rate hikes.

But Trump’s protectionist stance has also added to some investors’ risk aversion, as he has threatened to impose retaliatory tariffs on China, build a wall along the Mexican border and tear up the North American Free Trade Agreement (NAFTA).