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Pound slumps after May moots 'hard Brexit'

October 4, 2016

Sterling, the embattled UK currency, has fallen to new lows as the prospect of a "hard" exit from the EU seeps into investor sentiment in London. Meanwhile, equities are booming, as a weak pound boosts exports.

Großbritannien Theresa May beim Parteitag der Tories in Birmingham
Image: picture-alliance/dpa/F. Arrizabalaga

The pound was down 0.2 percent a 1.14 euros, hitting a three-year low against the European single currency on Tuesday as markets continued to digest the effects of a possible hard Brexit on the UK economy and its currency. 

Against the strong US dollar, it hit a nadir of $1.2735 in Tuesday's trading - its weakest value since June 1985. On July 23, the day of the referendum, with investors expecting a "remain" vote, Sterling had soared against the dollar to $1.50, before crashing back down on the Friday morning as the "leave" vote became apparent.

After weeks of relative stability around the 1.20-euro mark, the pound has now fallen 1.8 percent since Prime Minister Theresa May's speech on Sunday. She had said that the UK would start negotiations on leaving the EU by April 2017 - also suggesting that she preferred a "hard Brexit" to continuing to accept EU controls on migration policy, or to European courts continuing to trump ones in Britain. 

When asked about the fall in sterling, May told the BBC on Tuesday that currencies "of course go up and down," downplaying her comments' influence on the market developments.

UK Foreign Minister and Brexit campaigner Boris JohnsonImage: picture-alliance/AP Photo/B. Birchall

The pound's fall is also a boost for exporters and equity markets reflected this on Tuesday. British stocks fell just short of an all-time high on Tuesday as optimism grew that exporters and multinationals would benefit from the pound's slide.

The main FTSE 100 index was at one moment trading less than a point from the record of 7,122 set in April 2015 and closed up 1.3 percent at 7,074. The rally is due to the fact that the drop in the pound is potentially good for those British firms that already have huge business interests outside the UK, many of which are listed on the FTSE 100. 

'One of our main cards'

Back at the party conference for May's Conservatives in Birmingham, two of the UK's more committed "Brexit" campaigners took the stage on Tuesday, focusing on strategies for the upcoming negotiations on leaving the EU - which could take two years or more. 

International Trade Minister Liam Fox said on Tuesday that the UK would give no commitment on the rights of two million EU citizens currently living in the UK prior to negotiations with Brussels, describing them as "one of our main cards" in future talks. 

US Secretary of State John KerryImage: picture-alliance/AP Photo/J. DeCrow

Secretary of State for Exiting the European Union, David Davis, meanwhile, said the British government would negotiate a single deal when it leaves the EU and not seek to secure sector-by-sector deals. He said he expected the other 27 EU member states to be "pragmatic" over the Brexit talks, adding that there would be no need to negotiate separate deals for the financial sector and automakers.

Hard or soft Brexit?

May on Sunday finally mapped out some kind of timeline and priorities for how the UK will leave the EU. The government, she said, would  prioritize controls on immigration over access to the European single market - an approach known as a "hard Brexit."

For Brussels, free trade within the EU is tied to the other three of the bloc's "four freedoms," guaranteeing free movement of people, capital, goods and services. May's speech on Sunday was broadly interpreted as her clearest indication so far that she was willing to sacrifice free trade if it remained tied to the other three freedoms. 

International warnings

Meanwhile, US Secretary of State John Kerry said Tuesday that Washington will "insist strongly" that the EU and Britain keep close ties after  Brexit. "Let me underscore: the United States will support its friends and allies on both sides of the Channel as you work through the tough issues ahead," Kerry said during a speech in Brussels.

Meanwhile, Malta's prime minister, Joseph Muscat, whose country will hold the EU's rotating presidency when article 50 is invoked, reiterated the bloc's stance: single market privileges and freedom of movement "cannot be decoupled."

jbh/msh (Reuters, dpa, AP)


Brexit: Startup boost for Berlin?

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