Sterling has continued to slide with the trade-weighted-index now down 1.5% since mid-May to its lowest point since mid-March. GBP/USD traded as low as 1.305, a level not seen since early November.
Markets are increasingly focusing on the fact that time is running out for Prime Minister Theresa May’s government to put forward a detailed post-Brexit deal acceptable to both the European Union and British parliament. The British and European Parliament will have to approve such a deal in votes pencilled in for October-November and both UK-based companies and the EU have warned that this leaves the government with little time particularly given the modest progress made since the referendum two years ago.
Should the government fail to agree on an EU deal acceptable to all parties the UK would revert to World Trading Standards Organisation standards. This “cliff-edge” scenario would in effect be the hardest form of Brexit and cause significant disruption to UK trade and the economy as a whole.
Another weight on Sterling is the uncertainty of whether the Bank of England will be able and willing to hike rates at its August policy meeting. Three of the nine MPC members voted for a 25bp hike at the recent meeting. But for an August hike to become reality, two more members will have to join McCaffterty, Saunders and Haldane and they may first require greater assurances that the UK will avoid a cliff-edge scenario.
