Sterling sank to a 30-month low of below $1.21, hurt by a stronger dollar, renewed worries about a no-deal Brexit, and reduced Bank of England forecasts for British economic growth.
It came after the US Federal Reserve’s less-dovish-than-expected policy meeting on Wednesday spurred dollar buying, and before the Bank of England kept interest rates on hold, but cut its growth forecasts amid mounting Brexit concerns.
The pound shed more than 4% of its value in July, its worst month since October 2016, following new prime minister Boris Johnson’s vow to leave the EU on October 31 whether a transition deal can be agreed with Brussels or not.
This sparked panic among investors that Britain was on course for a disorderly divorce after 46 years in the world’s largest trade bloc.
Survey evidence shows that Irish manufacturing is already hurting, squeezed by both global trade wars and fears over Britain crashing out of the EU at Halloween that has sent sterling reeling.
The Central Bank warned this week that Irish growth would slow to a crawl next year if the worst was to happen at the end of October.
Sterling traded at 91.13 pence against the euro — reflecting the huge concerns over Brexit. Signs of a slowdown in the British economy also weighed on sterling.
British manufacturers’ output fell by the most in seven years in July, the Purchasing Managers’ Index survey for the manufacturing sector showed, as Brexit jitters and weaker global demand choked off growth.
Kit Juckes, currencies analyst at Societe Generale, said that amid “the ongoing political carnage as Boris Johnson lays out his Brexit plans and the weakness of the economy, there’s nothing to like about the pound”.
Sterling weakness is hugely significant for Irish exporters, particularly the huge number of Irish food processors and SMEs and the many jobs that rely on selling goods and services across the Irish Sea.
On the Bank of England’s trade-weighted index, which measures sterling against its trading partners’ currencies, the pound has dropped to its weakest since early November 2016, having fallen more than 7% since May.
The Bank of England kept rates on hold at 0.75%, but gave no indication that it was considering lowering interest rates like other central banks.
Governor Mark Carney said “profound uncertainties” over the future of the global trading system and Brexit were weighing on UK economic performance.
The Bank of England forecasts assume Britain avoids a Brexit shock, but it still cut its growth forecasts to 1.3% for 2019 and 2020, down from 1.5% and 1.6% respectively in its last forecasts in May.
“Sterling remains vulnerable to a further escalation in Brexit tensions and we anticipate the market will likely discount higher risks of a no-deal outcome in the weeks ahead,” said Roger Hallam, currency chief investment officer at JP Morgan Asset Management.
“The UK’s significant current account deficit — 4.4% of GDP — also makes the UK particularly vulnerable to a deterioration in Brexit sentiment,” he said.
A rising no-deal Brexit risk could further roil sterling, according to Bloomberg Economics. Its modelling suggests that for every percentage point increase in no-deal risk, trade-weighted sterling falls 0.2%.
If Britain crashes out without a deal, the pound could decline a further 13%.