The Pound to Euro exchange rate weakened by around four cents last week to hit a low not seen since the beginning of 2010.
‘Hard Brexit’ Fears Weigh On Sterling
Sterling tumbled to a three-year low last Monday in reaction to UK Prime Minister Theresa May’s plans to sever Britain’s ties with the European Union by March 2019. May’s tough stance on immigration, which suggests she will not attempt to retain membership of the single market post-‘Brexit’, piled more pressure on the Pound. Sterling even failed to catch a bid on news that UK manufacturing output hit a two-year high of 55.4 in September.
Tuesday saw construction activity print stronger-than-anticipated at 52.3 for September but the Pound’s woes continued as traders hedged against the possibility that Britain’s apparent ‘hard Brexit’ would impair the UK government’s ability to keep its overbearing current account deficit under control.
Pound Decoupling From Economic Issues?
The Pound remained lower against the single currency on Wednesday even though September’s service sector PMI showed an encouraging surge in output. The services industries account for around 80% of the UK’s GDP output and the sturdy 52.6 print suggests that Britain will not slide into recession in the second half of 2016. However, demand for Sterling remained weak as structural issues – i.e. the UK’s large account deficit, which is only likely to get bigger following a ‘hard Brexit’ that could deter direct foreign investment – took precedence over economic fundamentals and interest rate projections.
Thursday saw further Sterling losses as UK Chancellor Phillip Hammond confirmed the government’s plan to limit immigration from the EU, while German Chancellor Angela Merkel noted that this would force Britain to give up access to the single market.
‘Flash Crash’
Early on Friday morning the Pound suffered from a so-called ‘flash crash’ as low volume market conditions and a probable algorithmic trading fault sent Sterling into free-fall across the board. GBP/EUR tumbled three cents and ended up striking a six-and-a-half-year low south of 1.10 at one point. The fact that Sterling barely recovered its losses following the ‘flash crash’ suggests that there are further depreciations in store for the Pound over the next few months.
There is little new data on the calendar this week so we could see a period of relative stability following last week’s mammoth GBP/EUR plummet. However, the long-term outlook for the pair appears negative and some forecasters are even talking of parity or lower.