Sterling fell on Thursday, undermined by growing concerns of a ‘hard’ exit by Britain from the European Union and sidestepping Prime Minister Theresa May’s comments on the impact of loose monetary policy.
May, in a speech to the party faithful on Wednesday, had raised the issue of the side effects of ultra-low interest rates and money-printing bolstering a view that policymakers are probably reaching a limit to monetary stimulus with benchmark rates in several western countries already at negative levels.
It also led to speculation that the government was probably against further interest rate cuts by the Bank of England, given the adverse impact on savings and pensions.
“In our view, this suggests that once (BoE chief) Mark Carney’s term is finished at the BoE, he may be replaced by someone more hawkish on policy,” said Charalambos Pissouros, senior analyst at IronFX Global.
“Although this could be seen as a relatively bullish signal for sterling, traders are currently more concerned with political risks and the possibility of a “hard Brexit” rather than monetary policy or economic data.”
Carney was appointed in 2012 for five years, but has come under criticism from some political figures who said he tried to frighten the electorate into voting to stay in the European Union in a referendum held on June 23. Britons voted to leave the EU in the vote.
Sterling was down 0.2 per cent at $1.2720, not far from a 31-year low of $1.2686 struck on Wednesday. It has already lost over 2 per cent this week, hurt by May’s announcement on Sunday that the formal process to take Britain out of the EU will start by the end of March.
The euro was up 0.2 per cent at 88.085 pence, having struck a five-year high of 88.43 pence on Wednesday. Sterling trade weighted index was down at 76.1, its lowest since early 2009.
Many economists and investors think May’s government is leaning toward a “Hard Brexit” option where Britain quits the single market in favour of imposing controls on immigration. Some fear that could hinder trade and constrict the foreign investment needed to fund Britain's huge current account deficit, one of the biggest in the developed world.
Economic activity has held up better than many had expected since the June referendum to leave the EU, but many policymakers are anxious about the prospects for future investment. Subdued investments are likely to hit growth and lead to job losses.
A report on Tuesday commissioned by consultancy firm Oliver Wyman said Britain’s financial industry could lose up to £38 billion ($48.3 billion) in revenue if the deal leaves it with restricted access to the EU single market.
“May has pushed her party way across the centre ground - taking issue with self-serving individuals and businesses and appealing to the non-metropolitan voter,” said Chris Turner, head of currency strategy at ING.
“That does not bode well for financial services in Brexit discussions. While the euro/sterling could correct lower.... a dip to 87.35/50 looks a buy.