Fear of ‘Hard Brexit’ Led Sterling below Thirty Year Level

On Wednesday, the mighty Sterling, Britain’s pound, dipped below $1.27 for the first time since June 1985. The fear of a ‘Hard’ Brexit is pushing the currency to a five-year trough against a broadly stronger Euro.

Sterling has been stressed for a fortnight by qualms that Britain will priorities restraining immigration over promoting trade in its divorce from the bloc, thereby gumming up labor markets, limiting foreign investment and leading to cutbacks by banks and other global companies.

That has been the extensive takeaway for markets from this week’s conference of the ruling Conservative Party, and the Pound has slipped past long-term lows set in early July in reaction, although there were signs of steadiness in morning trade in London.

Sterling hit a 31-year low of $1.2686 after opening, before recovering to $1.2720, about flat on the day. It fell as much as 0.4% to 88.31 Pence per Euro before also clawing back some ground against the common currency.

Britain’s financial industry could lose up to £38 billion ($48.3 billion) in revenue in a ‘hard’ Brexit that would leave it with the constrained access to the European Union’s single market.

The latest phase in the fall of the Pound came after the U.K. Prime Minister Theresa May set a March date to start exiting the EU and said full trade access to the EU was a lesser priority than controlling immigration.

Theresa May has played down the significance of volatility in sterling. The 0.5% fall to 1.277 dollars mirrored concern in the markets over Mrs. May’s insistence that she will propound control over immigration after Britain leaves the EU, raising prospect that the UK is set for a "hard Brexit" in which it will lose full access to the single market.

And further indications of anxiety about the scenario for the UK economy came as the International Monetary Fund downgraded its forecast for Britain’s GDP in 2017 by 0.2% to 1.1% while increasing its outlook for this year by 0.1% to 1.8%.

Euro stands strong:

Wednesday also witnessed the Euro soaring to a five-year peak against the struggling Pound and scaled a three-week high against the Yen, supported by rising Euro zone government bond yields.

Nevertheless, increasing German bund yields saw rate differentials move in favor of the Euro, giving it the boost taking it 0.4% higher against the Pound at 88.31 Pence. This level was last seen five years ago, and at 115.545 Yen, it’s highest in three weeks.

The Euro was also 0.2% higher against the dollar at $1.1226, buying more Sterling as the Pound weakens.

Dollar slips:

The Euro’s rise saw the Dollar recoil from near a two-month high as compared to a basket of currencies. The greenback had been on a strong foothold after rising at the start of the week on an upbeat survey of the US manufacturing sector.

On Tuesday, it got an additional boost after Richmond Federal Reserve President Jeffrey Lacker announced that there was a strong possibility for raising interest rates and as Treasury yields went up to two-week highs in response to a surge by their Euro-zone counterparts.

The Dollar Index was down 0.15% at 96.038, having increased to 96.442 on Tuesday, it’s highest since August 9. It was a little lower at 102.77 Yen after rising to a three-week high of 102.965 on Tuesday, when it posted its sixth straight day of gains versus its Japanese peer.

Rupee halts its Rally:

The rupee had hit a one-month high against the US Dollar after the Reserve Bank of India (RBI) surprisingly cut interest rates by 25 basis points.

The Rupee closed at 66.46 against the US Dollar, up 0.18% from its previous close of 66.58. The home currency opened at 66.52 a dollar and touched a high of 66.39, a level last seen on 8 September.

On the same day, India’s Benchmark Sensex closed at 28,334.55 points, up 0.32% from its previous close and Nifty50 closed at 8743, 0.3% below its last closed price.

The 10-year government bond yield closed at 6.732%, compared to Monday’s close of 6.773%. Bond yields and prices move in different directions.

The dollar Index, which measures the US currency’s strength against major currencies, was trading at 96.219, up 0.55% from its previous close of 95.695.

On Wednesday, the Rupee lost five paise to end at 66.51, stopping its three-session rally, on new demand for the American currency from importers and banks amidst the time of global risk aversion. Bullish Dollar sentiment overseas together with sluggish domestic equity market largely impacted the domestic currency. The Dollar has presented a broad-based rally against all its major trading partners on growing confidence of economic activity. After trading in a taut range for the most part of the day, Rupee managed to cut back losses towards the end of the trade and settled at 66.51, a loss of five paise, or 0.08%.

At the same time, Asian currencies were trading lower after hawkish comments from US Federal Reserve officials. The Japanese Yen was down 0.79%, South Korean won 0.444%, Malaysian Ringgit 0.339%, Singapore Dollar 0.292%, Philippines Peso 0.205%, Thai Baht 0.112%, China Offshore 0.103%, China Renminbi 0.069% and Taiwanese Dollar 0.051%.

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