Sterling plunged 1.2 per cent against the euro in late trading on Tuesday to hit a seven-year low of 91.4p as investors continued to fret about a hard Brexit.
The euro has appreciated by more than 19 per cent against sterling since UK voters decided in June to exit the European Union, with the pace accelerating since British prime minister Theresa May said on October 2nd that she will start the formal Brexit negation process by the end of March.
Sterling also hit a fresh 31-year low against the dollar, falling almost 2 per cent on Tuesday, to $1.209 after European markets closed.
Anil Kashyap, a newly appointed member of the Bank of England's financial policy committee, added to nervousness around sterling on Tuesday after telling a British parliamentary committee that that a hard Brexit, where the UK gives up membership of the single market, could lead to a further drop in the value of currency. Bank of England monetary policy committee member Michael Saunders said in written testimony that he would not be surprised if sterling falls further.
"The sentiment on sterling is closely tied to expectations of hard Brexit," said Georgette Boele, a currency and commodity strategist at ABN Amro in Amsterdam, adding that the Bank of England officials' "comments are not helpful at all".
Euro’s surge
The Department of Finance highlighted in documents published in conjunction with Budget 2017 that the euro's surge against sterling "will pose significant challenges, particularly for parts of the exporting sector and areas sensitive to cross-border trade."
It warned that the long-term impact of Brexit will “crucially” depend upon the post-exit relationship between the UK and the EU, with a “soft exit” clearly preferable to a “hard” one what would involve trade restrictions.
“More recent developments in the euro-sterling bilateral rate, if sustained, could be problematic for some firms, especially those in labour-intensive industries with tighter profit margins,” the Department said.
Indeed, the Department’s forecasts that the economy, as measured by gross domestic product, will grow by 4.2 per cent this year and 3.5 per cent in 2017 is premised on the euro being valued at 81p in 2016 and 85p next year.
Department documents place a “high” risk against the foreign exchange rate in its list of external factors facing the economy.
Buffer
Minister for Finance Michael Noonan said in his Budget speech on Tuesday that he decided to retain a 9 per cent value added tax (Vat) rate for tourism related activities next year to underpin the industry in the wake of Brexit.
“This will act as a buffer for the sector against the weakness in sterling, which increases the cost of holidaying in Ireland for British tourists,” he said.
Ireland’s tourism sector, which accounts for over 150,000 jobs, is highly dependent on UK visitors, who accounted for 3.5 million overseas trips to this country last year, according to the Government.
(Additional reporting, Bloomberg.)
