Euro gains amid UK political turmoil

Sterling fell sharply against the dollar and euro yesterday, hurt by a new bout of political uncertainty that soured the outlook for a currency already reeling from weeks of turmoil over whether Britain will stay in the EU.

The resignation of Brexit supporter and works and pension secretary Iain Duncan Smith on Friday over planned welfare cuts proposed in last week’s budget highlighted a deepening rift within the ruling Conservative Party just three months before a referendum that will determine Britain’s future in the EU.

The uncertainty drove sterling to seven-year lows in late February and traders said the stark division within the ruling party did not bode well for the pound.

The euro was 0.4% stronger at 78.15 pence.

“Politics is going to be more important than economics for the next three months in the UK and so far, both major political parties seem pretty keen on tearing themselves apart from within,” said Kit Juckes, currency strategist at Société Générale.

“The resignation of Iain Duncan Smith will simply add another layer of political risk to sterling’s prospects.”

Sterling was at one stage down 0.5% at $1.4405, but holding above last week’s low of $1.4053 on Wednesday, when the UK government’s 2016 budget trimmed growth and inflation forecasts.

Mr Smith’s criticisms of “unfair” cuts in welfare — unusual in recent history on the British right — also threatened some of the commitments in last week’s budget.

“Sterling does not normally react strongly to UK politics so this is probably due to Brexit”, said Richard Benson, head of portfolio investment at currency managers Millennium Global in London.

“The referendum is just making people focus on issues like this a lot more. It is down in response this morning.”

A growing number of banks have warned of the risks of a crisis that could see sterling slide by up to 20% if Britain votes on June 23 to leave the EU.

Investors worry that leaving would hit growth and threaten the huge foreign investment flows Britain needs to fund its current account deficit, one of the biggest in the developed world at about 4% of national output.

Research commissioned by the Confederation of British Industry employers’ group showed a vote to leave could cost the UK economy £100bn (€128.3bn) and 950,000 jobs by 2020.

Following a Brexit vote, even the most favourable scenario would cost the UK economy dear.