Pressure Mounts on Pound as Hard-Brexit View Back in Spotlight

Updated on
  • Sterling approaches weakest level versus euro in three years
  • Pound ‘not being rewarded by markets,’ says CIBC’s Stretch

The pound approached its weakest level in three years versus the euro amid speculation that support in government is building for a so-called hard Brexit.

Sterling dropped versus most of its Group-of-10 peers amid concerns that the U.K. would surrender access to the European Union’s single market in return for securing control over immigration and being exempt from paying into the bloc’s budget.

The pound was also weighed down as a survey of a 100 business leaders showed more than three-quarters of chief executive officers said they would consider moving their headquarters or operations outside Britain due to the U.K.’s vote to leave the trading bloc.

The weekend news favors pro-Brexit ministers who are “edging the government toward a hard-Brexit scenario which is not being rewarded by markets,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “The debate about the financial sector and the impact that will have, the potential preemptive moves from some of the financial sector participants, is keeping sterling on the defensive.”

The pound depreciated 0.3 percent to 86.85 pence per euro as of 3:50 p.m. London time. It touched 87.25 pence on Aug. 16, the weakest level since August 2013. Sterling was little changed at $1.2965, having dropped 0.4 percent earlier. It touched a 31-year low of $1.2798 on July 6 and is down 13 percent versus the dollar since the June 23 referendum.

Risk Reversals

The premium for three-month options to sell the pound versus the euro compared with those to buy widened to 0.575 percentage point Monday, the most since July 26, risk-reversals data compiled by Bloomberg show.

Foreign Secretary Boris Johnson suggested on Sunday that the government will formally trigger an exit by May 2017.

Companies are concerned about the lack of clarity on a timeline for Britain’s exit from the bloc, CIBC’s Stretch said, as “business planning has a long gestation period and some degree of clarity is necessary in order to put contingency plans in place.” Stretch forecasts that the pound will drop to $1.25 by year-end, surpassing the low in the wake of the vote.

Citigroup Inc.’s U.K. Economic Surprise Index, which measures the strength of key data relative to analyst predictions, fell to its lowest since Aug. 17 last week. While a positive reading shows that U.K. data were stronger than economists forecast, the fall in the index shows that releases are beating estimates by a smaller margin than before.

The pound had previously been supported by “upside surprises to data out of the U.K.” following the Brexit vote, according to Sam Lynton-Brown, a foreign-exchange strategist at BNP Paribas SA in London.