Sterling came under further pressure on Friday amid mounting concerns over Brexit after data showed the UK economy contracted in the second quarter for the first time in more than six years.
The pound was down 0.7 per cent against the euro at €1.0733 around midday in London, hitting the weakest level against the common currency since 2017. The euro is within striking distance of breaching that level, and hitting its highest level against the UK currency since the wake of the 2016 Brexit vote.
Sterling also fell against the US dollar, leaving it down 0.6 per cent to $1.2065.
The sharp move lower came after a report showing the UK economy contracted 0.2 per cent in the second quarter from the first, confounding City of London economists who had forecast stagnation. Britain’s output has not fallen since the final three months of 2012, according to official data.
Sajid Javid, the UK’s chancellor, added to Brexit concerns by saying that while he wants a deal, he was “not frightened” of the UK leaving the EU at the end of October with no pact in place.
“If it comes to no deal . . . it’s not anything that I’m frightened of, I’m not worried about, I think we will be ready for it, we will get through it, and we will come out stronger and even more resilient,” Mr Javid told Sky News.
Economists said the fall in second-quarter gross domestic product was partially attributable to the unwinding of an inventory build-up in the first three months of 2019, when businesses were preparing for a potentially chaotic Brexit in March.
However, Fabrice Montagné, economist at Barclays, noted that the figures were “much weaker than expected”.
“Looking through the Brexit volatility we tend to conclude from today’s print that the underlying growth momentum is weaker than we previously thought,” he said.
The London-based bank reduced its forecast for output growth this year by 0.2 percentage points to 1.1 per cent, while also warning over the “increasing likelihood of a no-deal Brexit will only make things worse”.
Vadim Iaralov, foreign exchange strategist at BofA Merrill Lynch, added that “currency markets are spooked by a tangible prospect of a no-deal Brexit”.
“A no-deal Brexit is not a given and a deal or delay may yet be agreed to,” he said. “However, given a clear bearish message from the FX markets, investors should not be complacent about the status quo and should consider hedging their exposure.”
The recent fall in sterling brought the trade-weighted exchange rate, which gauges the value of the pound against the currencies of Britain’s biggest trading partners, to the lowest level since November 2016, according to Bank of England data as of Thursday’s closing level. Given the sharp drop on Friday, the index may fall further.
While large multinational companies tend to be insulated because they generate revenues in a variety of currencies, smaller ones with higher domestic exposure and which need to import goods from abroad have been taking a hit. This was illustrated on Friday, when UK package holiday group On The Beach issued a profit warning as it said it was forced to charge higher prices to travellers.
Additional reporting by Naomi Rovnick in London
