Sterling hit a seven-year low yesterday as currency markets took fright following a decision by London’s mayor, Boris Johnson, to back a vote to leave the EU.
Rating agencies Moody’s and Fitch fuelled the concerns, warning that a vote to leave the EU could have implications for Britain’s credit ratings; bookmakers cut the odds of a British exit in the referendum to 2/1.
“Overall, I think we are likely to see further sterling weakness ahead of the vote itself, as the debate rages and uncertainty undermines confidence,” warned Kit Juckes at Société Générale.
Yesterday’s selling left the pound as the worst-performing major currency of the day, adding to its weak start to the year. It is down 3 per cent since the start of January, the biggest drop of any major currency during 2016. Pressure on the pound intensified, leaving it down by as much as 2.4 per cent to a session low of $1.4058, its weakest level against the dollar since March 2009. Against the euro sterling fell by some 1 per cent though it did recover some ground in later trading to trade around 78p, having reached close to 78.5p at one stage.
Sterling weakness makes life harder for Irish exporters to the UK market, though it should cut the price of imports. However the main concern for Irish business will be the wider uncertainty caused in the run- up to the referendum and the potential complications in trade and commerce if Britain was to leave.
Moody’s said that for the UK the “economic costs” of a decision to leave the EU would “outweigh the economic benefits”. It said it would consider “reflecting those threats to the UK’s credit standing by assigning a negative outlook to the sovereign’s Aa1 rating following a vote to exit”.
Economic disruption
Fitch Ratings said an exit from the EU would lead to immediate “disruption” for many sectors of the economy and raise “significant longer-term risks”, reiterating that it would force the rating agency to reappraise the UK’s current AA+ grade.
Sterling's value against the euro could be hit if the prospect of a Brexit intensifies, though some analysts believe that the British currency could be oversold.
Prospects of poor growth in the euro zone may also limit the euro’s gains. – (Copyright The Financial Times Limited 2016)
