1. Sliding sterling still has some way to sink

Sliding sterling still has some way to sink

Sterling will plumb new multi-decade lows in the coming months as the battered currency extends its slide on concerns divorce proceedings with the European Union could be difficult and leave Britain outside Europe's single market, a Reuters poll found.

By: | London | Updated: October 6, 2016 6:13 PM
Britain is likely to narrowly dodge a recession in the coming year, a Reuters poll found last month, but the Bank of England may send borrowing costs to a new low next month in its latest effort to support the economy. (Reuters) Britain is likely to narrowly dodge a recession in the coming year, a Reuters poll found last month, but the Bank of England may send borrowing costs to a new low next month in its latest effort to support the economy. (Reuters)

Sterling will plumb new multi-decade lows in the coming months as the battered currency extends its slide on concerns divorce proceedings with the European Union could be difficult and leave Britain outside Europe’s single market, a Reuters poll found.

On Wednesday, the pound sank below $1.27 for the first time since 1985 amid growing fears of a ‘hard’ Brexit, and the poll of over 60 foreign exchange strategists said the trough had yet to be reached.

The median forecast in the poll, taken this week, suggested the pound would fall to $1.24 in the run-up to Prime Minister Theresa May triggering Article 50 to formally begin the two-year countdown to Britain’s exit from the EU.

The pound has been in retreat for most of the time since the ‘Leave’ vote carried the day on June 23, before which it traded around $1.50 on expectations ‘Remain’ would prevail in the membership referendum.

May said on Sunday she would pull the trigger by the end of March, whacking the currency once again on worries Britain will prioritise curbing immigration over promoting trade and leave the European single market.

A ‘hard’ Brexit along those lines is likely to pose further risks to growth and encourage more stimulus from the Bank of England.

“As it stands, Brexit hasn’t begun and there is a big fog of uncertainty as to how the UK’s trading relationship with the EU will be,” said Jane Foley at Rabobank.

“Given that political fog there is every reason to fear that investment spending is going to be pretty low and growth could stutter, and those factors are likely to come through as negative on sterling.”

Britain is likely to narrowly dodge a recession in the coming year, a Reuters poll found last month, but the Bank of England may send borrowing costs to a new low next month in its latest effort to support the economy.

It chopped interest rates to 0.25 percent, restarted its quantitative easing programme with a 60 billion pound top-up and announced two new stimulus schemes in August.

All that stimulus will lend little support to sterling, particularly as the US, Federal Reserve is expected to tighten policy, possibly as soon as December.

Median forecasts suggest the pound will be trading at $1.28 in a month, and then $1.27 in six and in 12 months.

Highlighting the uncertainty in the market about how the divorce proceedings will progress, the range of forecasts for a year’s time was very wide, from as low as $1.05 to $1.47, a near-recovery to where it was before the referendum.

Having already slipped to a five-year low against the euro on Wednesday, the pound is expected to lose further ground versus the common currency in coming months.

The euro reached 87.51 pence but will rise to 91p before the end of March, the poll found. Medians in the wider poll said it would be trading at 86.7p in a month, 86.6p in six and 86.1p in a year.

Four of the 61 strategists polled forecast one euro would be worth at least a pound at some point in the coming year.

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