Pound falls under $1.21 as brexit fears hit sterling – as it happened _ business _ the guardian

The pound endured another day of pressure from investors on Tuesday after continued jitters on the foreign exchange markets pushed it down more than two cents to $1.21.

Sterling recorded its worst four-day performance since the Brexit vote as a Bank of England official said he expected the pound to fall further in the coming weeks, driven by the referendum result and the UK’s trade deficit with the rest of the world.

The exchange rate with the US dollar stood at $1.30 last week when Theresa May opened the Conservative party conference and appeared to put regaining control of immigration above staying inside the EU’s single market free trade area. Social currency definition Investors took fright at the prospect of a hard Brexit and the currency has declined more than 6% against the dollar since then.

A flash crash last Thursday, when the pound fell by 6% in 10 minutes, heightened concerns that investors had lost faith in sterling as a major currency. Fx position definition A year ago a pound bought $1.55.

However, the pound’s decline had the opposite effect on the UK’s leading share index. Definition of currency The FTSE 100 touched a new intra-day record of 7,129.83 during afternoon trading, although it closed nearly 60 points lower after a late bout of selling, below the record closing figure of 7,104 reached last year. Restricted currency definition The driving force for the UK market’s recent surge has been the rapid decline in the pound, which has boosted the value of companies that earn much of their revenues in dollars.

Michael Saunders, a former investment banker who joined the monetary policy committee in August, said Britain’s large current account deficit was adding to the anxiety about the ability of the nation to pay its way once it quits the European Union.


Saunders said the current account, which measures the balance of trade, cash transfers and investment income with other countries, was already undermining confidence in the UK’s ability to pay its way before the EU referendum.

Speaking to MPs on the treasury select committee, Saunders warned it was now a major issue and compounding the already weak sentiment on currency markets towards sterling.

“If such a scenario were to materialise then, provided inflation expectations and pay growth remain well-contained, I would expect the mpc to largely look through any such direct effects on inflation of sterling weakness, even if they extend for several years.”

But the lower pound, which reduces the cost of UK goods and services sold abroad, could boost exports and offset much of the anxiety caused by the Brexit vote.

A fall in imports would also help to reduce the current account deficit, he said, adding that the government could take advantage of the current depressed situation to boost growth with extra spending.

Several Tory MPs, including supporters of the Leave campaign, have warned that leaving the single market will harm the economy and have demanded ministers make every effort to negotiate continued access.

But the hardline taken by Downing Street and an equally robust response from European leaders, who have emphasised the free movement of labour as a pillar of the single market, have heightened concerns in the City that Britain will eventually leave all the EU’s major institutions.

Kathleen Brooks, research director at financial betting firm City Index and Forex.com, says traders fear the UK could be dragged back by Brexit uncertainty.

May’s promises of immigration controls also pushed the pound down, as traders anticipated a Hard Brexit, which would deprive UK firms of membership of the single market.

• Under the “Getting Ireland Brexit Ready” programme, announced by the finance minister, a “rainy day fund” will be built up from surplus budgets for use as a contingency for public services in the event of a shock to the economy after Brexit Day, expected in 2019.

• A special €150m loan fund to help farmers with cash flow and short term borrowings is to be established amid concern many are struggling to cope with the sharp decline in the value of their exports to the UK,

• A special tax relief programme designed to help foreign investors with the smooth movement of staff from the US and elsewhere is to be extended until the end of 2020.

• A reduced nine per cent VAT rate is to be retained in the tourist sector to assist the competitiveness of the hospitality sector which is heavily dependent on UK tourists.

Perhaps reports that both Citi and Morgan Stanley have stated they will leave London if Britain appears to be heading for a hard Brexit have weighed on investors’ appetite for the UK index; perhaps it was a bout of profit-taking. Currency devaluation definition Either way the FTSE couldn’t hold onto its highs for long.

Chris Beauchamp of IG says investors are also driving the US dollar higher, because they expect American interest rates to rise before Christmas.

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