New Nadir

Brexit Gravity Pulls Down Pound

Sterling's stuck in a negative feedback loop.

The pound took another beating on the foreign-exchange market on Wednesday, dropping to its lowest level against the euro since 2009. Parity against the common currency beckons.

Poised for Parity?

The pound dropped to its lowest level since 2009 against the euro on Wednesday

Source: Bloomberg

The trigger for the latest leg lower was a purchasing managers' index survey showing manufacturing in the euro zone beat expectations in August, expanding from the prior month rather than declining as economists had anticipated.

Manufacturing PMIs

The euro zone is outpacing the U.K.

Source: IHS Markit via Bloomberg

While the next PMI survey for the U.K. isn't scheduled for release until Sept. 1, the Brexit-induced gap isn't likely to close any time soon.

Moreover, there's a key difference between the pound's current travails and what was happening on the market when it touched its record low against the euro at the end of 2008. This time, sterling is worth about $1.28 against the greenback, down from about $1.40 at the time of its nadir against the common currency.

Universally Weak

The pound is even weaker against the dollar than it was when it reached a record low versus the euro

Source: Bloomberg

That double whammy leaves the pound vulnerable to posting a new record low on a trade-weighted basis against the currencies of its biggest trading partners.

Revisiting Record Low?

The pound's value on a trade-weighted basis

Source: Bloomberg POUND index

Note: Index starts from Dec. 31, 2004 with value of 1,000. Index weights for 2017 are 41.2 percent euro, 36.4 percent dollar, remainder other currencies

There's a distinct possibility that sterling's weakness will surpass even the dark days of last year in the months after the U.K.'s shock decision to quit the European Union.

While that in theory should help British exporters, the textbooks say it will also boost inflation -- further crimping cash-strapped Brits at a time when wage growth is lackluster. For now at least, the pound remains trapped in a negative-feedback cycle.

(Corrects data label showing today's low in first chart.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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