An important measure of the value of the pound has dipped to its lowest level on record amid fears among currency traders and investors that the UK is heading for a hard Brexit.
The Bank of England reported that the sterling Effective Exchange Rate Index (EERI) – a measure of the value of the pound that is calculated according to how much trade we do with different countries and in various currencies – fell to 73.8 on Tuesday, down 0.55 per cent on Monday.
This largely reflected Tuesday's steep sell-off of sterling against the dollar and the euro – prompted by signals that the UK is on course to leave the single market by 2019 and possibly without a free trade deal with the rest of the EU in place by then.
That slippage took the EERI to its lowest level on record ~ dipping below the 73.5 nadir during the 2008 financial crisis and also the 73.6 trough in 1993 in the wake of Britain’s ejection from the Exchange Rate Mechanism.
The EERI is weighted according to the UK's bilateral trade flows, with the US currently accounting for 18 per cent, China 9.3 per cent and the euro area 48 per cent.
In total the EERI covers 21 countries and the series goes back to 1975.
The modern era of free-floating exchange rates began in 1973, following US President Richard Nixon's decision to take the dollar off the Bretton Woods gold-exchange standard.
Bank of England economists and policymakers pay a good deal of attention to the EERI because it represents a broad snapshot of the competititivess of UK industry and possible future import price pressures, containing more information than individual bilateral exchange rates such as the pound versus the dollar or versus the euro.
Sterling recouped some of its losses on Wednesday, ending up around 0.73 per cent against the dollar at $1.22 on the back of a pledge by Theresa May that she will alow a House of Commons debate before Article 50 is invoked next year.
Against the euro the pound also rose 1 per cent higher to €1.10.
But against the dollar sterling remains 18 per cent lower than on 23 June.
And against the euro the pound is 15 per cent down.
The EERI, as of yesterday, was down 15.5 per cent since the referendum.
What experts have said about Brexit
What experts have said about Brexit
1/11 Chancellor of the Exchequer Philip Hammond
The Chancellor claims London can still be a world financial hub despite Brexit “One of Britain’s great strengths is the ability to offer and aggregate all of the services the global financial services industry needs” “This has not changed as a result of the EU referendum and I will do everything I can to ensure the City of London retains its position as the world’s leading international financial centre.”
2/11 Yanis Varoufakis
Greece's former finance minister compared the UK relations with the EU bloc with a well-known song by the Eagles: “You can check out any time you like, as the Hotel California song says, but you can't really leave. The proof is Theresa May has not even dared to trigger Article 50. It's like Harrison Ford going into Indiana Jones' castle and the path behind him fragmenting. You can get in, but getting out is not at all clear”
3/11 Michael O’Leary
Ryanair boss says UK will be ‘screwed’ by EU in Brexit trade deals: “I have no faith in the politicians in London going on about how ‘the world will want to trade with us’. The world will want to screw you – that's what happens in trade talks,” he said. “They have no interest in giving the UK a deal on trade”
4/11 Tim Martin
JD Wetherspoon's chairman has said claims that the UK would see serious economic consequences from a Brexit vote were "lurid" and wrong: “We were told it would be Armageddon from the OECD, from the IMF, David Cameron, the chancellor and President Obama who were predicting locusts in the fields and tidal waves in the North Sea"
5/11 Mark Carney
Governor of Bank of England is 'serene' about Bank of England's Brexit stance: “I am absolutely serene about the … judgments made both by the MPC and the FPC”
6/11 Christine Lagarde
IMF chief urges quick Brexit to reduce economic uncertainty: “We want to see clarity sooner rather than later because we think that a lack of clarity feeds uncertainty, which itself undermines investment appetites and decision making”
7/11 Inga Beale
Lloyd’s chief executive says Brexit is a major issue: "Clearly the UK's referendum on its EU membership is a major issue for us to deal with and we are now focusing our attention on having in place the plans that will ensure Lloyd's continues trading across Europe”
8/11 Colm Kelleher
President of US bank Morgan Stanley says City of London ‘will suffer’ as result of the EU referendum: “I do believe, and I said prior to the referendum, that the City of London will suffer as result of Brexit. The issue is how much”
9/11 Richard Branson
Virgin founder believes we've lost a THIRD of our value because of Brexit and cancelled a deal worth 3,000 jobs: We're not any worse than anybody else, but I suspect we've lost a third of our value which is dreadful for people in the workplace.' He continued: "We were about to do a very big deal, we cancelled that deal, that would have involved 3,000 jobs, and that’s happening all over the country"
10/11 Barack Obama
US President believes Britain was wrong to vote to leave the EU: "It is absolutely true that I believed pre-Brexit vote and continue to believe post-Brexit vote that the world benefited enormously from the United Kingdom's participation in the EU. We are fully supportive of a process that is as little disruptive as possible so that people around the world can continue to benefit from economic growth"
11/11 Kristin Forbes
American economist and an external member of the Monetary Policy Committee of the Bank of England argues that the economy had been “less stormy than many expected” following the shock referendum result: “For now…the economy is experiencing some chop, but no tsunami. The adverse winds could quickly pick up – and merit a stronger policy response. But recently they have shifted to a more favourable direction”
Most economists argue that the plunging value of the pound is a negative verdict on the UK economy's prospects, signalling financial markets expect the UK will grow less as a result of leaving the EU.
They also expect the fall in the value of the pound to push up domestic prices, imposing a real-terms squeeze on household incomes,
However, some, such as the former IMF economist Ashoka Mody and the former Bank of England Governor Lord King, have argued that sterling was overvalued before the referendum and that the rapid correction will help the UK economy rebalance, not least by boosting exports by making UK goods and services instantly more competitive in global markets.Reuse content