Pound plummets amid ‘Brexit’ fears

Bank of England governor says weaker currency could offset other economic frailties and help boost inflation

PUBLISHED : Tuesday, 23 February, 2016, 8:17pm
UPDATED : Friday, 15 April, 2016, 11:33am

The pound extended its biggest decline since 2010 as Bank of England policymakers said uncertainty over Britain’s future membership of the European Union was weighing on the currency.

Sterling’s slide on Monday took it to the lowest level in seven years against the US dollar after London Mayor Boris Johnson, one of the nation’s most popular politicians, said he would campaign for Britain to leave the EU in a June referendum. Sterling’s 1.8 per cent plunge was the biggest since it tumbled the same amount on the day of an inconclusive general election on May 6, 2010.

Bank of England officials including governor Mark Carney said on Tuesday that the weaker pound could offset Britain’s other economic frailties and help boost inflation. Carney added that the central bank was not making any judgement on the outcome of the EU vote, which could lead to the nation exiting the political and economic bloc – a so-called “Brexit”.

Brexit is certainly weighing on the pound
Daniel Brehon, Deutsche Bank

“Brexit is certainly weighing on the pound,” said Daniel Brehon, a foreign-exchange strategist at Deutsche Bank in London. “But structural concerns such as the current-account deficit were already a problem beforehand. Long-term the depreciation may help boost inflation but pass-through has been underwhelming so far.”

Deutsche Bank was bearish on the pound and forecast a drop to US$1.28 by the end of the year, Brehon said.

The pound fell 0.3 per cent to US$1.4109 by 11.26am in London on Tuesday, after dropping to US$1.4058 on Monday, the lowest since March 2009. It lost 0.1 per cent to 78.03 pence per euro after sliding 0.9 per cent a day earlier. Sterling declined to its weakest level on a trade-weighted basis since March 2014.

The prospect of Britain leaving the world’s largest single market is adding to the losses caused by traders pushing back bets on the timing of a Bank of England interest rate increase. Together, these factors have helped push the pound lower against all of its G10 peers this year.

It was “increasingly clear” that the moves in the pound and in options insuring against a future drop in sterling “have spiked to levels” similar to those seen in the Scottish referendum campaign of 2014, Carney told British lawmakers.

The pound “has under-performed ahead of UK political events in the past,” Commonwealth Bank of Australia strategists including London-based Peter Dragicevich wrote in a note. “The upcoming referendum will be no different.”