The pound has fallen below $1.20 amid reports Theresa May will set Britain on course for a “hard Brexit” in a major speech.
Ahead of the address – in which the Prime Minister is expected to signal that Britain is prepared to quit the European Union’s single market – sterling slid to its lowest level against the dollar since October’s “flash crash” in Asian trade. It also fell to a two-month low versus the euro. But the currency edged up slightly, back above $1.20, after it emerged that Donald Trump had told The Times he hoped a new US-UK trade deal could be negotiated “quickly” after Brexit. The pound is 20% down on the dollar since last June’s referendum – a level not regularly seen since the mid-1980s.
While a weaker sterling makes UK goods more competitive abroad, it means imports are more expensive. Analysts said the latest sterling fall reflected market jitters over the Brexit negotiations and the prospect of Britain crashing out of the European trading bloc. Several Sunday newspapers reported that Mrs May will say the UK is prepared to leave the single market, customs union and European Court of Justice in her speech at Lancaster House on Tuesday. Her red lines for the negotiations will reportedly be an end to free movement from the EU and freedom to strike new trade deals around the world – neither of which are thought to be achievable within the single market.
Downing Street described the reports as “speculation” but the approach appeared to be backed up by Chancellor Philip Hammond – who warned the UK could slash business taxes if it is denied access to European markets after Brexit. In an interview with the German Welt am Sonntag newspaper, Mr Hammond said: “If we have no access to the European market, if we are closed off, if Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage at least in the short-term. “In this case, we could be forced to change our economic model and we will have to change our model to regain competitiveness. And you can be sure we will do whatever we have to do. “The British people are not going to lie down and say, too bad, we’ve been wounded. We will change our model, and we will come back, and we will be competitively engaged.”
Kathleen Brooks, an analyst at City Index, said reports of the UK leaving the single market had been “like kryptonite” to traders. She wrote: “The FX market has spoken, and, as of Sunday night, it is not confident that Theresa May can deliver the necessary clarity and confidence when she lays out her Brexit plans.” Sean Callow, a senior currency strategist at Westpac Bank in Sydney, told Bloomberg: “It is difficult to make the case for the pound to avoid testing – probably breaking – the ‘flash crash’ lows in coming weeks.” The flash crash on 7 October saw the pound fall below $1.19 – its lowest post-referendum level – before recovering. A report published last week said the crash, during Asian trading, was caused by a range of factors, including the time of day.