The pound has fallen below the $1.20 mark, a level sterling has not regularly traded at since 1985, ahead of a speech on Tuesday when UK prime minister Theresa May is expected to signal that Britain will fully break out of the EU's common market after Brexit.
The UK currency fell as much as 1.6 per cent to a low of $1.1986 – a break of this threshold last seen only briefly during October’s flash crash – against the dollar in early Asian trading in an unusually wide gap from Friday’s New York close at $1.2175.
Although Mrs May has given strong signals she intends to take Britain out of the single market since taking office in July, her public statements on the subject have repeatedly spooked the foreign exchange market, sending sterling sharply lower in October and earlier this year.
Investors said market fears of damage to Britain’s trading relationship with Europe is now being compounded by nervousness that the UK government does not have a firm grasp on the way ahead.
“The idea of a soft versus hard Brexit is redundant now – it’s a matter of how fast the hard Brexit arrives,” said Ray Attrill, global co-head of forex strategy at National Australia Bank in Sydney.
Monetary policy
Mark Carney, the Bank of England governor, is scheduled to speak on Monday night, an address traders are watching closely to see whether the central bank chief may signal a change in monetary policy because of the pound’s fall and its impact on inflation as import prices rise.
Sterling’s fall on Monday started at the weekly opening of foreign exchange trading in New Zealand, where traders said the pound first traded in Wellington at $1.2085, representing a fall of almost a cent from its close on Friday.
The pound steadied to about $1.2020 as Asia’s bigger foreign exchange trading centres came online, but came under pressure again early in London trade, briefly dipping to $1.1992 as European trading floors filled up before recovering to $1.2032.
At midday trading in London it had pared off some of its losses, hovering around $1.2054 as investors took heart at comments by Donald Trump, the US president-elect, that his administration would be open to a bilateral trade deal with Britain once it left the EU.
Mr Attrill noted that the pound traded steadily down to its low point. The steady action indicated investors were happy to buy and sell at the lower levels rather than sitting back in fear while the price plunged – as happened during the worst moments of October’s flash crash.
While Mrs May is not expected to go into great detail about the UK government’s stance as its self-imposed deadline for beginning negotiations looms, investors increasingly expect a tougher exit where Britain is no longer part of the single market.
Complexity
Adding to concerns over the tenor and complexity of the approaching talks, chancellor Philip Hammond on Sunday warned that the UK would seek to undercut the EU on taxes if it was not granted good access to the single market.
Traders were positioning on Monday for further turbulence in the pound. One-week implied sterling volatility, which measures demand for options to hedge against big swings in the currency over the period, hit its highest level since shortly after the Brexit vote. It reached 17.86 per cent, up from 14.4 per cent on Friday. One-month implied volatility rose to 13.33 per cent on Monday from 12 per cent at the end of last week.
Strategists in Asia said investors had also taken note of other reports in British media that suggested the government would be prepared to withdraw from tariff-free trade with the EU in favour of cutting its own deals elsewhere.
“Mrs May’s ‘closely guarded’ speech that she’s due to deliver Tuesday would appear to have been leaked all over the Sunday papers,” said Ian Johnson, strategist at 4Cast-RGE consultancy.“It is a bit like the monster behind the door – tomorrow’s speech may not be quite so frightening when we hear it. I would be a tentative buyer of sterling at these levels.”
The pound also opened sharply lower against the euro, with the single currency jumping 1.1 per cent to a nine-week high at £0.8853 from a Friday close at £0.8721. In London it was trading at £0.8802. – Copyright The Financial Times Limited
