The pound stumbled towards Christmas, falling for the fourth consecutive day against the euro reflecting investors’ concerns about the UK’s economic prospects in 2017.
Sterling was half a per cent weaker against the euro on Thursday, pushing it a two-week low of €1.1780. Against the dollar, the pound hovered just above $1.23, its lowest level since November 23. Over the past two weeks the pound has fallen 2.8 per cent from $1.2774.
A consumer confidence index published on Thursday showed a marginal improvement in December, but the measure remained in negative territory. Expectations for the UK’s economic outlook showed a further decline, plumbing its second lowest level since April 2013 and beaten only by July, the month after the EU referendum.
Howard Archer, chief economist at IHS Global Insight, said concerns over the economic outlook “fuels belief that consumer spending will slow markedly in 2017 amid weakening fundamentals”.
Some of this week’s sterling’s weakness stems from a European Court of Justice decision that places ratification of future EU trade deals in the hands of national parliaments rather than EU institutions.
Analysts said the ruling meant a post-Brexit UK trade deal with the EU could be vetoed by a single member state, underlining the complexity of upcoming negotiations.
Sterling has recently weathered the post-referendum fallout which saw its value against the dollar shrink by more than a fifth.
In the wake of setting a 31-year low of just above $1.21 in mid-October, it rallied by 5 per cent, boosted by a softening in the tone of ministers’ Brexit language.
Despite prime minister Theresa May pleasing UK businesses on Monday by endorsing support for a transitional deal with the EU, investors have this week been more inclined to sell the pound. It is 4.8 per cent lower against the yen, and more than 1.5 per cent weaker against both the Australian dollar and the New Zealand dollar.
“Our concern is that the market is too complacent and optimistic in its Brexit pricing as UK asset pricing seems to suggest the market is moving away from a hard Brexit pricing, with little concrete reason,” said Jordan Rochester, FX strategist at Nomura.
Setbacks in economic data could push the euro higher against the pound to 88p and drop sterling below $1.20, Nomura strategists added.
UBS strategists said recent sterling strength was likely to prove temporary. “We have argued that a Brexit-induced adjustment in the UK’s current account will necessitate further currency weakness,” said the bank, predicting that sterling would fall to parity with the euro.
Although it was possible to envisage an eventual soft Brexit outcome, this would take time to unwind, meaning “the direction of travel remains one towards Brexit”, UBS said.
As well as Brexit negotiations, sterling may be pulled in different directions against the dollar depending on how the US economy fares. Jane Foley, FX strategist at Rabobank, said the dollar should remain well supported into mid-2017 but start to soften because of weak wage inflation.
