Harder Brexit stance by Tory contenders hits sterling

Sterling has fallen below levels hit in a “flash crash” earlier this year to lows last traded more than two years ago as worries over a disorderly Brexit intensified.

The pound fell 0.7 per cent on Tuesday to $1.2433, leaving it on course for its biggest single-session fall since March and taking it below the level breached in a temporary fall in January this year and to its lowest since April 2017. It was down 0.3 per cent on the euro at €1.108.

The two contenders to replace Theresa May as Conservative leader and British prime minister, Boris Johnson and Jeremy Hunt, both hardened their stances on renegotiating the withdrawal agreement with Brussels in their final leadership debate on Monday, ruling out any changes to the Irish backstop and instead insisting it must be ditched altogether. The EU has previously ruled this out.

“It will take a big charm offensive by Boris Johnson to move them. Hence why folks are saying this increases the risks of a no-deal Brexit,” said Jordan Rochester, FX strategist at Nomura.

Sterling is the worst performing major currency against the US dollar over the past 12 months, and has fallen more than 2 per cent so far in July alone as investors have repriced the likelihood of a hard or no-deal Brexit amid tough rhetoric from Mr Johnson in particular, the overwhelming favourite. He has promised to leave the EU at the end of October deadline “come what may”. 

“In terms of the broader direction in UK politics, it certainly seems to us that foreign exchange investors have been gradually assimilating the notion that there is no easy way out of Brexit and that something eventually has to give,” said Stephen Gallo, head of FX strategy at Bank of Montreal.

Traders are braced for a rough ride for the currency in the lead up to the October 31 deadline when Britain leaves the EU. 

“Over the next few weeks and months, the UK will have a new prime minister, chancellor, cabinet, Bank of England governor, budget and Brexit plan. Despite all the above, FX vols are near historical lows once again. This is unlikely to last,” Mr Rochester said. 

Investors in UK assets moved into the relative safety of UK government debt on Tuesday, sending yields lower, albeit at a measured pace.

The yield on benchmark 10-year gilts was down 1.5 basis points at 0.787 per cent. UK debt maturing over 2 years was yielding 0.563 per cent, down 1 basis point.

London’s FTSE 100 outperformed its continental European peers as the pound plumbed its lows, with the overseas earnings of its multinational constituents flattered when repatriated into sterling. London’s main stock index was up 0.4 per cent, against a rise of 0.1 per cent for the Europe-wide Stoxx 600.


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