Pound sinks to bottom of G10 league table as Brexit fears return

The pound is the worst-performing major currency this month, as renewed concerns about a no-deal Brexit combine with talk of negative interest rates to push the currency to its weakest since March’s dramatic sell-off.

Sterling has lost nearly 4 per cent of its value against the dollar in May — putting it at the bottom of the G10 performance table — and has slipped nearly 3 per cent against the euro. The pound hit an overnight low at $1.2073 before regaining some ground to trade at $1.2139 by Monday lunchtime in London. It is the third-weakest major currency this year, with only the New Zealand dollar and Norwegian krone faring worse.

The pound came under renewed selling pressure at the end of last week after the third round of talks between the EU and UK on their future relationship stalled. Investors have become increasingly concerned about the lack of progress. The UK, which is in a standstill transition period until the end of the year, has previously ruled out an extension and said it would walk away from negotiations if there were no clear outline for an agreement by June.

“The last thing the UK and eurozone economies need right now is another negative shock from a no-deal Brexit,” said Lee Hardman, a currency analyst at MUFG Bank in London.

Vasileios Gkionakis, head of FX Strategy at Lombard Odier, said the deteriorating state of the UK’s finances and the coronavirus-induced decline in economic activity call for an urgent deal with the EU. Without a deal, he said, the pound could drop to parity with the euro and to historic lows against the dollar.

Barclays analysts said the pound could “comfortably” trade below $1.20 by the end of June because of Brexit risks and the weakening economy. The Bank of England has predicted the crisis could push the UK into its worst recession for 300 years.

Discussion of negative interest rates has added to the downward pressure. Andy Haldane, the Bank of England’s chief economist, said in an interview with the Sunday Telegraph that the central bank was “looking at” the option of cutting its key rate into negative territory. The BoE has reduced interest rates to their lowest level on record at 0.1 per cent and launched a bond-buying programme to lessen the economic impact of the pandemic.

“It would be a surprise if the BoE introduced negative rates, [but] it would increase downside risks to our outlook for the pound,” said Mr Hardman, who nevertheless expects the pound to trade at about $1.29 by the end of the year.

Dominic Bunning, a senior currency strategist at HSBC in London, cut his forecast on the pound because of the possibility of a no-deal Brexit and the UK’s rising level of debt-to-gross domestic product, which the bank estimates could move above 100 per cent. Mr Bunning expects the pound to trade at $1.20 by the end of the year, down from the $1.35 exchange rate he had forecast.