TOKYO – Sterling dropped Monday on reports Britain may be headed for a clean break with the EU, a so-called “hard Brexit”, just ahead of a key speech by Prime Minister Theresa May,AFP reports.
The pound tumbled to $1.1986 shortly after 3:00am (1800 GMT Sunday) Tokyo time, hitting its lowest level since the October 2016 ‘flash crash’ when sterling briefly dived to a 31-year low of $1.1841.
Britain’s currency has since recovered some ground to sit around $1.2030 at 11:00am (0200 GMT), still down from $1.2197 Friday. The euro also rose against sterling, buying 87.87 pence briefly Monday, its highest since November, against 87.15 pence on Friday.
The pound took a hit after weekend reports fuelled worries about Britain’s exit from the European Union. Matching stories in several British weekly newspapers said May was prepared to accept a so-called “hard Brexit”: pulling out of the single market, the European customs union and the European Court of Justice, in order to regain control of EU immigration.
The reports came ahead of a speech Tuesday in which May is to set out how Britain would handle its divorce from the EU. “The weekend reports were undoubtedly the factor that pushed the pound down,” said Nomura forex strategist Yoshitaka Suda.
“Markets are watching what Britain does.” The pound’s partial recovery during Asian trading hours was due to investors adjusting positions ahead of the comments on Tuesday, as Britain gets set to launch two years of EU departure negotiations.
“Negotiations of this size and importance are bound to involve an element of bluff to ensure that the UK would get the best possible deals,” Stephen Innes, a senior trader at OANDA forex firm, said in a commentary.
“Without actual confirmation of these ‘hard’ measures, we could be viewing little more that sell the rumour, and we may end up buying the fact.” Suda at Nomura added: “It may not be a good idea to fret too much over (the speech) at this point now.”
Finance Minister Philip Hammond’s interview with a German newspaper also helped kindle hopes for the British economy, Suda added. Speaking with Germany’s Welt am Sonntag newspaper, Hammond said Britain would be forced to “change our economic model” in order to remain competitive if it is shut out from access to the single European market.
He hinted that London was ready to push through aggressive cuts to business taxes to ensure British-based firms remained competitive in the face of EU tariffs.
“He didn’t use a phrase like ‘tax haven’ …and it wouldn’t be something as extraordinary as a zero corporate tax. But it helped sustain the pound,” Suda said. The pound has lost nearly 20 percent against the dollar since Britain voted in June to exit the EU.