Sterling slide erodes gains for Irish exporters

Sterling yesterday continued to slide from its recent heights against the euro, eroding some of the exceptional advantages that have propelled Irish exporters, as British output figures appeared to show that the strong UK currency is punishing its manufacturing industries.

That, in turn, increased market bets that the Bank of England would delay raising interest rates — which would tend to buoy the currency — until late 2016.

British industrial output suffered its sharpest fall in almost two years in November and retail spending disappointed over Christmas, while the uncertainty about the date and outcome of the in/out referendum on whether Britain will remain in the EU added uncertainty to the outlook for the British economy.

Sterling dropped against all 16 of its major peers, approaching its weakest level since February against the euro.

“The numbers are weaker than expected,” said Stuart Bennett at Banco Santander.

Sterling fell 0.5% to 75.01 pence per euro, having touched 75.55 pence on Monday, the weakest since February 4, 2015.

Sterling also fell 0.5% to $1.4470 at one stage, after touching $1.4459, the lowest since June 2010.

Philip O’Sullivan, chief economist at Investec Ireland, said the ‘Brexit’ debate would likely increase volatility for trading in sterling as UK prime minister David Cameron mulls over the date to hold his promised referendum.

Paddy Power yesterday said the betting still favoured a referendum result that kept Britain in the EU — with a probability of more than 36% that the country would exit the bloc.

Citigroup chief economist Willem Buiter also placed about a one-in-three chance on the UK voting to exit the EU.

Speaking to reporters in Dublin on Monday, Mr Buiter said it’s “pretty likely” the UK vote will be held in the summer, adding investors are only beginning to recognise the “serious risk” of a Brexit.

Should the UK opt to leave the bloc, the EU would seek to negotiate tough exit terms, Mr Buiter said.

An exit would be “be a disaster for Britain”, said Mr Buiter, and the 27 remaining EU members would strike an extremely tough bargain with the UK.

Sterling has declined 6.5% over the past six months, partly driven by concern over the prospect of the UK exiting the EU.

Still, some investors are more sanguine, with Martin Gilbert, chief executive officer of Aberdeen Asset Management, saying in an interview a UK vote in favour of leaving the EU would be “inconvenient but would not be too disastrous”.

JP Morgan said it now expects the Bank of England’s Monetary Policy Committee — the MPC — to wait until the final months of the year before hiking interest rates from record-low levels.

“This [industrial] report is the straw that breaks the camel’s back,” said JP Morgan economist Malcolm Barr.

“Recent disappointment in the pay data and the drop in oil prices had already put our call for the MPC to raise rates in May at risk.”

The Bank of England will publish its first monetary policy decision of the year tomorrow.

Economists do not expect any change to the eight-to-one majority of policy makers who want to keep rates on hold.

Additional reporting: Reuters and Bloomberg