Tough Brexit talk fuels sharp drop in sterling
Sterling fell sharply yesterday as both candidates to become UK prime minister talked up their willingness to execute a hard Brexit during Conservative Party leadership debates.
On the eve of the Brexit referendum, it cost 76.5 pence to buy one euro. Now, with a hard Brexit fast approaching, a euro costs 90.22p and sterling looks set for further decline.
The Central Bank of Ireland said earlier this year that a hard Brexit could push the euro to 97p, and some economists have warned that parity – a one-for-one euro-sterling exchange rate – is a real possibility. Betting odds put Boris Johnson, who has said he could walk away without a deal, as 95pc certain to become Britain’s next prime minister, although the same odds show a 55pc chance the UK will still be an EU member at the end of this year.
Erik Norland, chief economist at the CME Group, the world’s biggest derivatives exchange, said sterling could be in for a dramatic autumn as the October 31 Brexit deadline looms.
“In other words, the downside potential for the pound becomes more acute as we enter the fall months,” Mr Norland wrote in a research report.
While the pound has fallen to levels not seen since 2017 against the dollar, hitting $1.2418 yesterday, it has traded weaker than 90p to the euro much more recently, and its move to 90.38p was the weakest since January this year. Even with signs of relative strength in the UK economy, which the European Commission expects to grow by 1.3pc this year and so outperform Germany, the pound has been weighed down by Brexit.
Any sharp moves in the pound and a fall towards parity will magnify the economic impact here.
Ryanair and the ferry operator Irish Continental have already warned of the impact of Brexit, and even though a weaker pound would push inflation here lower in the short term, there is a risk that the negative supply shock could cause prices to push higher, eroding wage gains in Ireland.
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