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Pound sterling value hits new low against the dollar: What happens next and why is it important?

HSBC analysts say sterling could keep on falling sharply to hit $1.10 by the end of 2017

Zlata Rodionova
Thursday 06 October 2016 19:16 BST
Theresa May’s declaration that Article 50 would be triggered by the end of March 2017 caused the pound to plummet
Theresa May’s declaration that Article 50 would be triggered by the end of March 2017 caused the pound to plummet (AFP/Getty)

Fears of the consequences of a “hard Brexit” sent the pound tumbling to a new 31-year low against the dollar on Wednesday, leaving UK businesses, markets and Britons asking: what’s next for sterling?

How significant is sterling latest slump?

Sterling appeared to be stabilising following its dramatic drop after the UK’s vote to leave the EU, helped by recent solid economic surveys and data.

But Theresa May’s declaration on Sunday that Article 50 would be triggered by the end of March next year has sent the pound to a fresh 31-year low against the dollar, breaching the previous post-referendum vote level set in July.

Sterling slipped beneath $1.27 (to $1.26932) for the first time since 1985 in early morning trading on Wednesday before scraping back just above $1.27 by 11am.

It also hit a five-year low against the euro today of €1.1308.

Dominic Bunning, FX strategist at HSBC, told the Financial Times that the importance of the Article 50 notification is Brexit negotiations are now “front and centre of the market’s mind and this focuses investors in on these above challenges”.

This means Brexit is driving the markets as fears mount among currency traders that the UK is heading out of the single market by 2019.

Since the UK vote to leave the EU, sterling has fallen 13 per cent against the dollar and is worth almost 20 per cent less than a year ago.

What’s next for sterling?

Sterling’s plunge this week is an indication that the markets clearly believe that there will be a hard Brexit following Theresa May’s comments over the weekend.

But forecasts for where the currency is going next vary hugely mainly because there is still no clear indication about what leaving the EU actually means for the UK.

Some analysts predict that the pound’s value could plunge to new depths due to the atmosphere of uncertainty, with speeches by ministers or adverse new data having a profound impact on the currency markets.

“The pound’s drop is likely to be a series of spaced-out depreciations, with the trigger for weakness being each piece of new information on the economic sacrifice that the UK government is willing to take on the path to Brexit,” Koon Chow, macro and forex strategists at UBP, said.

HSBC analysts released the biggest downward forecast, saying sterling could keep on falling sharply to hit $1.10 by the end of 2017.

Carlo Alberto De Casa, chief analyst at online broker ActivTrades, said: “As far as the pound goes, this week is a write off. It is difficult to see a quick recovery in prices after this morning’s lows against the dollar and euro – and it could go lower.

“Investors are still analysing what could happen after March when Article 50 will be triggered and this fear is dominating the currency market.”

However, others are saying the pound has now found the price floor and expect it to eek its way higher towards the end of 2017 as the new relationship between the UK and EU becomes more clearly defined.

How is this affecting you?

The pound was worth $1.55 in October last year. Now it is hovering at about $1.27.

This means the money you are carrying in your wallet is worth less than before.

The reason for that is directly related to the pound’s purchasing power.

As many travellers will have already discovered, it means more expensive holidays abroad.

Down the line it is also likely to push up inflation sharply as the price of imports rises.

However, not all is negative.

A weaker pound also means UK exports are cheaper, boosting the UK’s manufacturing industry.

Spending by UK foreign visitors also picked up over the summer as the sharp drop in the pound against the euro, dollar and other currencies boosted visitor spending power.

Service sector companies also reported a further recovery of activity from July’s brief downturn. Although the rate of expansion slowed slightly, inflows of new business grew at an increased rate.

Could more solid economic data trigger a sterling rally?

Possibly. The encouraging service sector PMI has given some relief to the pound on Wednesday as it recovered slightly from its early morning selloff. This suggests further decent economic data could help it recover from its current losses.

However, analysts think politics is more likely to drive the currency in the next few months.

The markets will have an eye on the Chancellor Philip Hammond’s Autumn Statement on 23 November, when the Government will lay out its spending priorities.

The Bank of England’s Monetary Policy Committee (MPC), which decided against further stimulus measures last month, also hinted that rates could be cut again at its next meeting in November.

“Market participants understand that while Brexit has been voted, it has yet to be started. As a result the impact on growth remains, mainly due to the uncertainty,” Nomura’s FX strategist Charles St Arnaud told the Financial Times.

“But at that point, I think politics trumps economics and sterling is still very vulnerable to the exit process being uglier and more drawn out than assumed,” he said.

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