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Friday, 7 October 2016

Sterling weak, pinned down near 31-year lows on "Hard Brexit" concern


Sterling fell on Thursday, undermined by concerns of a "hard" exit by Britain from the European Union and Prime Minister Theresa May's comments on the impact of loose monetary policy which some saw as a thinly-veiled attack on the central bank.

May, in a speech to the party faithful on Wednesday, raised the issue of the side effects of ultra-low interest rates and money-printing.

Although her spokesman later played down suggestions that the speech signalled changes ahead in monetary policy, it led to speculation the government was against further cuts by the Bank of England, given the adverse impact on savings and pensions.

Some saw the comments as an attack on the BoE's independence, raising more uncertainty for the currency.


"In our view, this suggests that once (BoE chief) Mark Carney's term is finished at the BoE, he may be replaced by someone more hawkish on policy," said Charalambos Pissouros, senior analyst at IronFX Global.

"Although this could be seen as a relatively bullish signal for sterling, traders are currently more concerned with political risks and the possibility of a 'hard Brexit' rather than monetary policy or economic data."

Carney, who was appointed in 2012 for five years, has been criticised by some political figures who said he tried to frighten the electorate into voting to stay in the European Union in a referendum held on June 23. Britons voted to leave the EU in the vote.

Richard Falkenhall, a currency strategist at SEB, said May's comments should be seen in the light of recent criticism by politicians of ultra-easy policies by central banks.

"Central banks have been independent in most western economies for a few decades now but we are seeing a shift in politicians' views of late. We have to take May's comments in that perspective," Falkenhall said.

Sterling was down 0.25 percent at $1.2717 GBP=D4, not far from a 31-year low of $1.2686 struck on Wednesday. It has already lost more than 2 percent this week, hurt by May's announcement on Sunday that the formal process to take Britain out of the EU will start by the end of March.

The euro was near a five-year high while sterling's trade-weighted index was stuck near lows last seen in early 2009.

HARD EXIT

Many economists and investors think May's government is leaning toward a "Hard Brexit" option where Britain quits the single market in favour of imposing controls on immigration. Some fear that could hinder trade and constrict the foreign investment needed to fund Britain's huge current account deficit, one of the biggest in the developed world.

Economic activity has held up better than many had expected since the June referendum, but many policymakers are anxious about the prospects for future investment. Subdued investments are likely to hit growth and lead to job losses.

A report on Tuesday commissioned by consultancy firm Oliver Wyman said Britain's financial industry could lose up to 38 billion pounds in revenue if the deal leaves it with restricted access to the EU single market.

"May has pushed her party way across the centre ground, taking issue with self-serving individuals and businesses and appealing to the non-metropolitan voter," said Chris Turner, head of currency strategy at ING.

"That does not bode well for financial services in Brexit discussions. While the euro/sterling could correct lower.... a dip to 87.35/50 looks a buy.


Reference: Anirban Nag

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