Sterling slumped to its lowest level for eight years against the euro at close of trading yesterday (23 August), amid fears that a Brexit slowdown is increasingly likely.
The pound declined to 1.083 versus the euro, the lowest level since October 2009. Overall, since last June’s Brexit vote, the pound is down around 17 per cent again the euro. Similar losses, in the region of 13 per cent, have been racked up against the US dollar. At the time of writing £1 buys $1.2822.
The world of currency markets is largely a game of confidence; given that household spending levels have hit a two and a half year low, the pound is likely to remain under pressure, particularly as there are now signs of a sustained recovery taking place in Europe.
Figures from the Office for National Statistics showed that household spending grew a mere 0.1 per cent between the first and second quarter of 2017 – the lowest quarterly growth figure since the fourth quarter of 2014. A decline in new car sales was pinpointed as one of the main reasons behind the slowdown.
Overall growth, as measured by the UK gross domestic product (GDP), was 0.3 per cent for the second quarter, which represents the slowest growth among European and G7 countries.
Previously, the economy was predicted to grow by 2 per cent, but now it is predicted to only grow by 1.7 per cent. The UK growth forecast for 2018 remains unchanged at a lower rate of 1.5 per cent.
Kathleen Brooks, a research director at City Index, expects the euro to continue strengthening against the pound for a couple of months, until the Conservative Party conference takes place in October.
She explains: ‘Europe’s economic story remains strong and broad-based, while the political risk has moderated. This is in contrast to the UK and the US, where heightened levels of political risk threaten the economic outlook.
‘Overall, we think that it could be tough for the pound to rally this autumn until we get the Tory Party conference out of the way in October. There is some fear in the FX market that Theresa May could be ousted at the conference this year, which is also keeping a lid on GBP gains.’
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, is also downbeat. He expects the UK economy to continue to struggle. ‘Recent surveys of export orders have picked up, but exporters are too reliant on imports for net trade to fully offset a further slowdown in consumers’ spending,’ he says.
‘Indeed, inflation still has further to climb, and the sharp fall in consumers’ confidence over the last two months suggests that households won’t continue to cut their saving rate. Meanwhile, we expect Brexit risk to increasingly bear down on business investment as the U.K.’s exit date draws nearer.’
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