London - The pound again bore the brunt of Theresa May’s
Brexit planning, falling beneath $1.20 for the first time since October after
newspapers reported she is prepared to leave Europe’s single market and customs
union if that’s what it takes to regain control of immigration and law-making.
Sterling slid against all of its major peers ahead of the
UK prime minister’s much-anticipated speech on Tuesday. Downing Street declined
to comment on speculation, but said May will call for a “new and positive
relationship” with the European Union.
Making investors more jittery is the Sunday Times’s
citing of government officials as saying they expect her comments to cause a
further “market correction.” Bloomberg’s Tim Ross and Svenja O’Donnell report
the Treasury intends to speak to major banks after May’s speech to smooth the
reaction.
Traders have previously viewed May’s pronouncements on
Brexit as a reason to sell the pound as she tends to fan speculation she is
prioritizing social issues such as clamping down on foreign labour over the
trading needs of the economy.
The pound dipped below $1.20 in early trading for the
first time since last October’s so-called flash crash, when it plumbed a
three-decade low of $1.1841. Meanwhile a measure of anticipated swings for the
currency climbed to the highest in three months.
While May has repeatedly refused to give a “running
commentary” on her strategy, Bloomberg’s Alex Morales proves she has actually
said quite a bit on topics from trade to the courts since taking office six
months ago.
Trump card
May got a boost on Monday as US President-elect Donald
Trump said he will offer Britain a fast and “fair” trade deal.
Reversing the warning of President Barack Obama that the
UK would be at the “back of the queue,” Trump told The Times “we’re gonna
work very hard to get it done quickly and done properly. Good for both sides.”
“Brexit is going to end up being a great thing,” he said,
predicting other countries will leave the EU.
The olive branch will reinforce the view of those who
campaigned for Brexit that the UK can prosper once it’s free to sign its own
trade pacts. It will therefore make leaving the customs union more appealing,
reinforcing May’s hand in the divorce talks by allowing her to highlight she
has opportunities outside Europe.
Toughening up
The UK government signalled it is toughening its stance
towards the EU.
Chancellor of the Exchequer Philip Hammond laid down the
gauntlet by telling Germany’s Welt am Sonntag that the UK will do “whatever we
have to do” to boost its competitiveness if it can’t access the EU’s market
after Brexit. That was interpreted as a hint he could cut corporate taxes and
employment rules.
Hammond was criticised by opposition Labour Party leader
Jeremy Corbyn for seeming to threaten a trade war. Norbert Roettgen, chairman
of the foreign affairs committee in Germany’s lower house of parliament, told
Die Welt that Hammond’s comments are “an expression of Britain being at a
loss.”
The Guardian also reported the Netherlands plans to block
any EU trade deal with the UK unless the British pledge not to start a “race to
the bottom for profits taxation.”
Meantime, Brexit Secretary David Davis said the EU could
“fail” if the negotiations don’t end with a strong new trade agreement with the
UK European leaders repeatedly say Britain can’t have a better deal outside the
EU than inside.
Klaus Regling, chief executive officer of the European
Financial Stability Facility, told Bloomberg Television on Monday that the UK
will be the biggest loser from a “hard Brexit” because it will reduce foreign
investment.
Inflation worries
The declining pound risks complicating life for Bank of
England Governor Mark Carney.
As he prepares to deliver his first speech of 2017 on
Monday, sterling’s weakness is threatening to push up inflation, which is
already rising at the quickest pace since 2014. That risks limiting the ability
of the central bank to support economic growth with easy monetary policy.
For now, the median forecast of economists surveyed by
Bloomberg News is that there will be no change in interest rates until at least
the second quarter of 2019, the year Carney will step down. When that move
comes, the survey suggests a greater likelihood it will be a hike than a cut.
BLOOMBERG