Brexit worries drive sterling to six-week low against euro

A 3D banner is held up during a 'March for Europe' demonstration against Britain's decision to leave the European Union, in central London in July. The sterling has dropped to a new low amid Brexit fears.
A 3D banner is held up during a 'March for Europe' demonstration against Britain's decision to leave the European Union, in central London in July. The sterling has dropped to a new low amid Brexit fears.PHOTO: REUTERS

LONDON (REUTERS) - Sterling slipped to a five-week low against the euro on Monday, as lingering worries over the economic impact of Britain's impending exit from the European Union weighed on the currency.

The pound also traded close to a five-week low against the dollar at $1.2985 (S$1.77), leaving it less than two cents away from the three-decade low below $1.28 it plumbed in the wake of June's Brexit vote.

After hitting that low in July, sterling gained 5 per cent versus the dollar by early September, as data showed the post-referendum economy holding up better than had been feared. But with parliament back from its summer recess, Brexit worries have come back into investors' radar and have dampened appetite for the currency.

Against the euro, sterling fell as much as half a per cent to 87.16 pence, its lowest since August 16 and close to the three-year low of 87.245 pence it touched on that day.

"We're just three months past the June Brexit vote, and the British pound is sitting awfully close to its post-Brexit lows," said DailyFX currency analyst Christopher Vecchio. "(It) topped out on September 6 - the day after UK parliament came back into session. The moment UK policymakers were in front of the media discussing the realities of Brexit...the pound began to suffer."

Sterling was knocked late on Thursday when British Foreign Secretary Boris Johnson said he expected formal divorce proceedings between Britain and the EU, triggered by Article 50 of the Lisbon treaty, to begin early next year, and that two years might not be needed to negotiate a deal.

Investors worry that an exit from the single market will drag the UK into a recession and blow out Britain's ballooning current account deficit, already among the highest in the developed world at around 5 per cent of gross domestic product. A wider current account deficit tends to lead to a lower currency.

"The comments from Johnson around the timeframe for Article 50 to be invoked and that the Brexit negotiations do not need to take two years have had a detrimental impact on sterling," said Jameel Ahmad, chief market analyst at FXTM.

On Thursday, Britain will release second quarter current account deficit data and forecasts are for a slight narrowing of the gap. "The current account data may underline once again that a demand side economic rebound increases external funding risks should the supply side of the British economy weaken from here," Morgan Stanley said in a morning note.