Pound steadies after biggest fall since 2016

City trader Image copyright Getty Images

The pound has stabilised after Thursday’s turmoil sparked by the political fall-out from Theresa May’s Brexit plan.

Sterling edged up against the dollar to $1.2816 in the absence of any more resignations caused by the prime minister’s proposal.

The pound suffered its biggest fall for two years on Thursday, while UK-focused shares also saw steep declines.

Shares in housebuilders and banks continued to languish on Friday.

Pound v US dollar

What has happened to the pound?

Despite the Prime Minister announcing on Wednesday that she had secured cabinet backing for the draft Brexit agreement with Brussels, the resignations of Brexit Secretary Dominic Raab and Work and Pensions Secretary Esther McVey on Thursday rattled markets.

On Thursday, the pound registered its highest volatility since the referendum in June 2016 as it fell 1.7% against the dollar and dropped 1.9% against the euro.

In the absence of any further resignations, the pound stabilised on Friday morning. But the stability may not last, analysts said.

“As long as ‘no deal’ remains as likely as it is, there is a risk of a sterling depreciation spiral that is self-intensifying,” said Ulrich Leuchtmannan, a foreign exchange strategist at Commerzbank.

“Sterling volatility has woken up from its 100-year slumber and is likely to remain reactive.”

James Bevan, chief investment officer at CCLA Investment Management, told the BBC’s Today programme that there were some “interesting fundamentals” affecting the pound.

Among them are the slower economic growth in the UK than the EU and the US, which means that interest rates in the UK may not rise as quickly as those in other parts of the world. This makes the pound less attractive to investors.

What is happening to share prices?

During Thursday, shares in companies that are heavily exposed to the UK economy saw the biggest falls, with housebuilders and banks being particularly hard hit. Royal Bank of Scotland sank 9%, while housing firms Persimmon, Taylor Wimpey and Barratt Developments were all down by about 7%.

On Friday, RBS shares were down another 2% at 218.7p.

Among the housebuilders, Persimmon and Barrett fell another 1% while Taylor Wimpey was down 0.5%.

The FTSE 100 index was little changed at 7,031.82, while the FTSE 250 – which is generally regarded as a closer barometer of the UK economy – was up 12.57 points at 18,674.78.

What do businesses say?

Big business had been generally supportive of the draft Brexit agreement published on Wednesday.

Warren East, chief executive of engineering company Rolls-Royce, told the Today programme that time was running out and that any deal was better than leaving the EU without an agreement.

“I would, as a business leader, like to see politicians on both sides of the fence get on and negotiate a practical deal that works for business,” he said.

Eyes are on businesses such as Rolls-Royce which operate a “just-in time” model where parts arrive in the UK from across the EU as they are needed.

The head of the Co-operative Group has warned that availability of fresh food from both the UK and abroad could be hit by a no-deal Brexit.

Steve Murrells told BBC Radio 5 live that stockpiling was not an option as “there is not enough chilled capacity to do it”.

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