Has the pound fallen lower against the dollar and the euro?

  • img Harvey Cawdron
  • POSTED ON 08 Aug 2018

Claims

For the first time in almost a year, the pound has fallen below $1.29 amid increasing fears of a no deal Brexit. 

Sterling also hit a 9-month low against the Euro, and was down against both the yen and the Swiss franc.

On Friday, Bank of England governor Mark Carney said that the chances of the UK leaving the EU without a deal were 'uncomfortably high'. International trade secretary Liam Fox said on Sunday that the chances of a no deal were 'certainly not much more than 60-40'. 

These falls come despite increases in UK interest rates, which usually increase the value of the country's currency. 

The pound has fallen 1.7% against the dollar and 0.8% against the euro since the start of the month. 

A foreign exchange expert at Mizuho Bank, Neil Jones, said that 'Some are thinking in the market that the Bank of England raised rates in order to give them ammunition to cut them in the face of a no-deal. The next move by the central bank could be a cut rather than another hike.' 

Jordan Rochester, a Nomura strategist, said 'We remain bearish on the pound in the short term until the Brexit mess is out the way...' 

A cheaper pound will make imports, and anything else bought by foreign exchange, more expensive. From the perspective of foreign nationals, it makes the UK a less attractive place to work. 

However, it does increase the competitiveness of UK exports. In the first 3 months of 2018, the UK exported a record £87bn in goods to other countries, following a year in which they hit £338.9bn, an all-time annual high. 

Investors are currently focused on an important meeting in November, during which Theresa May will attempt to negotiate terms of the withdrawal agreement with EU officials. 

Some economists believe that a no deal would result in an economic downturn for the UK and its trading partners. The IMF suggested that economic growth across the remaining 27 EU states would decrease by as much as 1.5% by 2030, and cut nearly 4% of the UK's GDP. 

However, others believe that the dangers of a no deal have been overstated. Sir Bernard Jenkin said 'The civil service and the government are feeding industry - and the industry is feeding the government - with this diet of gloom and alarm and despondency.' 

Jeremy Stretch, the head of foreign exchange strategy at CIBC, said 'If there's no improvement in the negotiating strategy with the EU, we could see the pound going back to levels not seen since last autumn, around $1.28 - and if it falls through that, it could go lower still. And unless the economic data in the UK starts to validate the rise in interest rates, it's hard to see the pound regaining any strength.' 

The pound's fall has been made worse by the recent strength of the dollar, after encouraging economic numbers and good company profits in the first 2 quarters of the year. 

However, Stretch said that after studying the pound's performance on a monthly basis over the last 15 years, CIBC had found that it usually underperformed during the August holiday period.