The pound was the biggest faller on foreign exchange markets on Monday, sliding to its lowest level against the dollar since late October, after Theresa May warned there was no prospect of Britain keeping “bits” of EU membership.
In an interview at the weekend, the UK prime minister told Sky News that “often people talk in terms as if we are leaving the EU but we still want to keep bits of membership of the EU. We’re leaving; we’re coming out.”
Later, Mrs May said after a speech in central London that she was seeking a “new relationship” for Britain outside the EU.
“I believe it will be a relationship that will have a good trading deal at its heart.”
Asked if the markets were misreading her intentions, she said: “The people who are getting things wrong are those who print stories saying I’m talking about a hard Brexit”.
She said she did not accept the terms “hard” and “soft” Brexit, insisting she would negotiate a good deal giving British business good access to the single market.
With Mrs May having pledged to trigger the start of official exit negotiations by the end of March, currency traders and investors are hungry for any indications of the government’s strategy.
Sunday’s comments from Mrs May were her first public ones on leaving the EU this year and could renew fears of a hard Brexit in which control of immigration ranks higher than keeping any access to Europe’s single market.
“We think the pound’s performance reflects an FX market that is entirely consumed by the murky political outlook for the UK,” said Stephen Gallo, European head of foreign exchange strategy at Bank of Montreal.
“Since about the time of the Conservative Party Conference last year, I have seen FX investors take the ‘most-bad’ aspect of the political dynamic and trade sterling on the face of that. 2017 is no different so far; we have no concrete plan of action from Number 10 and so the FX market assumes the worst.”
In early trading in London, sterling fell 1.1 per cent to $1.2149. Against the euro, it was 1.2 per cent weaker at £0.8672. That took sterling back to levels last seen against its nearest neighbour in November.
Sterling failed to bounce after Reuters reported that Mrs May’s spokesman said the prime minister was ruling nothing in or out before starting departure talks with the EU, and that she wanted the best deal for businesses to trade with the free market.
The pound’s fall against the dollar added to a decline of 1.1 per cent on Friday that, in turn, has helped London’s FTSE 100 reach further highs. A weaker pound flatters the earnings of UK companies made in foreign currency and helps make exports more competitive. The main London stock index rose 0.4 per cent to set the intraday high at 7,239.26.
There are already signs that traders’ fear of a hard Brexit is building this year. The biggest bet made by speculators across currencies last week was for further falls in the pound, according to data from CFTC, a US regulator.
Philip Hammond, UK chancellor, is still arguing the case that Britain should seek to remain at least partially a member of the customs union, intended to allow the trade in goods to continue without border checks and tariffs.
The single market sets common rules for the trade in goods and services, as well as facilitating the free movement of capital and people; the European Court of Justice enforces the rules in the market covering 500m people.
Analysts said political discord over the UK’s Brexit strategy would weigh on sterling even though economic data were proving resilient, and there were also predictions that political risk would continue to weigh on sterling for longer than previously thought.
“Until the government finally presents a concrete and convincing strategy, market participants will increasingly fear a disaster,” said Esther Reichelt at Commerzbank.
Simon French, chief economist at Panmure Gordon, said: “We remain of the view that this preparedness to ‘walk away’ is a rational part of the negotiating process but that a mixed model with sector-specific arrangements will eventually result.
“However, we expect this to be achieved well beyond the formal two-year end point for exit negotiations — leaving a problematic cliff edge in the second quarter of 2019.”
