Sterling will slump to 90 pence against the euro in the coming months in the wake of the Brexit vote, putting pressure on Irish firms exporting to Britain, leading analysts have predicted.
A weak sterling against the euro harms the profits and jobs prospects of Irish firms who rely on the UK market because an appreciating euro instantly erodes price competitiveness of many firms.
The currency forecasts come as sterling fell sharply for a second trading day amid a sell-off of assets exposed to the UK.
Investors again sought the safe haven markets by buying gold and German bunds.
Sterling fell to below 83.2 pence against the euro from 81 pence on Friday, as currency markets tried for a second day to assess the economic and political risks facing Europe following the unexpected vote by the UK to exit the EU.
Sterling was trading at 78 pence ahead of the referendum.
The slump means Irish exporters selling across the Irish Sea have seen a huge erosion of about 6.5% in their competitiveness since Thursday’s Brexit vote.
Cantor Fitzgerald Ireland and Davy Stockbrokers now project sterling will likely slump to 90 pence in the coming months because there is no straightforward way for the UK and the rest of Europe to sort out new trade and political accords.
Markets have begun again to fret about political groups which oppose the EU gaining ground in Italy and France, even as markets worried less about the outcome of the weekend election in Spain.
Analysts say that fears about the implications of a Brexit on other European countries will play out through the currency markets.
“Our view is that sterling will continue to cheapen up. It is not just a two-day market shock.
"It is difficult to construct an argument for sterling to appreciate and we do not see it turning around in the short term,” said Ryan McGrath, a senior trader at Cantor Fitzgerald Ireland.
“We believe it will be at between 85 pence and 90 pence going into the year-end with obvious ramifications for Irish exporters,” Mr McGrath said.
Davy Stockbrokers chief economist Conall Mac Coille said though only 17% of Irish exports are sold into the UK that the goods across the Irish Sea nonetheless account for a large number of jobs in indigenous Irish companies. Inward tourism could also be affected by a sharply weaker sterling against the euro.
“It all depends when it gets sorted out. Whether the UK access to the single market is preserved or what the new agreement will be,” Mr Mac Coille said.
Philip O’Sullivan, chief economist at Investec Ireland, said sterling could drift lower to 85 pence “but we think that is as bad as it gets”.
Investec believes the sell-off in UK assets may be overdone as reflected in the shares in Royal Bank of Scotland yesterday slumping to the lowest level since 2009, despite the financial system being in much better shape and central banks being better equipped to deal with crises since the depth of the financial crisis.
“A rocky few months lie ahead and we are reminding people that Irish SMEs need to talk to their advisers to protect themselves against volatility,” Mr O’Sullivan said.
Gold rose yesterday to €1,205 an ounce and has now climbed 10% over the last two trading days “driven by safe-haven demand”, said Mark O’Byrne, research director at GoldCore.
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