British pound plunges to three-decade low

The slump in the pound followed remarks from Prime Minister Theresa May that Britain would trigger its exit from the EU next year, and hawkish comments about Federal Reserve rates from a US official.
The slump in the pound followed remarks from Prime Minister Theresa May that Britain would trigger its exit from the EU next year, and hawkish comments about Federal Reserve rates from a US official.PHOTO: EUROPEAN PRESSPHOTO AGENCY

Sterling slides against US$ amid expectations of Federal Reserve interest rate hike

LONDON • Britain's pound sterling slumped to a three-decade low against the greenback yesterday as concerns over a "hard" Brexit were compounded by hawkish comments from a US Federal Reserve official, which spurred wagers that US interest rates will rise before the end of the year.

The sterling was at its weakest since 1985, hit by a growing sense that the United Kingdom may be heading for a difficult period ahead where it severs links to the European Union's single market in favour of total control over immigration.

Robust construction data could not prevent another 0.7 per cent fall for the pound as it extended Monday's heavy tumble to wallow at US$1.277 and a three-year low of 87.5 pence per euro during yesterday's trade. It was at 1.7485 against the Singdollar.

The sterling is down against all its 16 major peers since Prime Minister Theresa May's weekend announcement that Britain would trigger its exit from the European Union in the first quarter of next year.

Declines extended since she was said to refuse to prioritise the protection of the financial-services industry in negotiations with the EU.

"It is now abundantly clear that access to the single market is not on Theresa May's list of top priorities and the market is realising that... there is more pressure for the pound in the weeks and months ahead," said UniCredit's Global head of FX Strategy Vasileios Gkionakis.

The US dollar got a boost as futures traders increased their wagers on higher borrowing costs, with the market-implied odds of a Fed hike by the December meeting rising to 61 per cent on Monday, up 10 percentage points from a week earlier. Fed Bank of Cleveland president Loretta Mester, one of three policymakers to dissent to favour an increase at the September meeting, said on Monday that she expects the case for a rate hike to remain "compelling."

The sterling will end the year little changed at US$1.28, according to the median estimate in a Bloomberg survey. Some see it going much lower, though, with four forecasters - including HSBC Holdings - predicting a drop to US$1.20.

The UK currency has already slumped 14 per cent since the British people voted to quit the EU.

Not everything headed south though alongside the pound.

The lower exchange rate will cushion the economy by helping exporters, and the currency's losses this week have buoyed the FTSE 100 Index of stocks, which surpassed 7,000 for the first time in 16 months.

It should also help the Bank of England achieve its goal of faster inflation. The 10-year break-even rate, a bond-market gauge of expectations for prices over the next decade, climbed to the highest since the middle of last year.

BLOOMBERG, REUTERS

A version of this article appeared in the print edition of The Straits Times on October 05, 2016, with the headline 'British pound plunges to three-decade low'. Print Edition | Subscribe