The pound tumbled on Monday, notching up a five-day run of losses that more than erases its post-election rally as investors face growing anxiety around the possibility of a hard and chaotic Brexit in the coming months.
The currency suffered one of its worst weeks of the year last week, and the selling has continued, with sterling dropping by as much as 0.7 per cent against the dollar to a low of $1.2916. It also tumbled 0.6 per cent against the euro, to €1.166.
In the immediate run-up to Christmas holidays, trading tends to be sparse, and small trades have the ability to generate exaggerated market moves. Still, the pullback illustrates that an ugly exit for the UK from the EU remains a pressing concern for UK markets.
“PM Johnson is still using the threat of a no-deal Brexit as a negotiating tactic in the forthcoming trade talks with the EU,” wrote analysts at Rabobank. “This is likely to ensure that Brexit remains a driving factor for the pound.”
The pound surged after Boris Johnson’s election victory on December 12, but has since reversed all of those gains as the prime minister signalled a hardline stance in Brexit negotiations with the EU. He pledged last week to outlaw any extension to the UK’s post-Brexit transition period at the end of 2020.
Dean Turner, UK economist at UBS Global Wealth Management, said investors should be prepared for “wide trading ranges” in sterling, between $1.30 and $1.40, as further negotiations take shape.
“It’s possible that there will be some bounce in activity given the clarity on Brexit, but any improvement in sentiment is likely to fade as the next Brexit deadline draws closer,” he said.
Ruth Gregory, senior UK economist at Capital Economics, said: “We doubt sterling will rise again substantially as long as there remains the possibility of something like a ‘no deal’ at the end of next year.”
