The pound slumped to a 31-year low against the dollar on Tuesday (Oct 4) on concerns over the timing and terms of Britain’s planned exit from the European Union, while London stocks surged.
Britain’s currency also struck a fresh three-year low point against the euro, helping to drive London’s benchmark FTSE 100 index up to an 18-month high beyond 7,000 points, as British exporters benefit from a weaker pound.
The British economy has showed signs of improvement in the months since the shock vote to leave the EU but concerns remain about the wider long-term impact.
The International Monetary Fund on Tuesday cut its 2017 growth forecast for Britain, blaming Brexit, and warned the damage could be greater if negotiations lead to trade barriers.
British Prime Minister Theresa May said at the weekend that her government would start the process of leaving the EU within the next six months – possibly leading to Britain severing ties with the single market.
The pound on Tuesday struck US$1.2740 – its lowest level since 1985 – and 87.66 pence to the euro, the weakest level since 2013, before recovering slightly.
“It seems that it is going to be hard to provide a tourniquet for sterling’s recent wounds given the solidity of the newly announced Brexit timeline,” said Connor Campbell, analyst at traders Spreadex.
‘WORTH MORE IN POUNDS’
The FTSE rallied to close with a gain of 1.3 per cent compared with Monday’s close.
“The reality is the biggest stocks in the index dominate its performance, and the likes of HSBC, Royal Dutch Shell, and British American Tobacco all have international earnings which are now worth more in pounds and pence thanks to sterling’s decline,” said Laith Khalaf, senior analyst at stockbrokers Hargreaves Lansdown.
In the eurozone, Frankfurt’s DAX 30 stocks index won just over 1.0 per cent compared with Friday’s finish. The DAX was shut Monday for a German public holiday.
Deutsche Bank shares were 1.5 per cent higher at €11.75, after last week plunging to historic lows on fears for its financial health.
Elsewhere, Asian stock markets rose with Japanese stocks boosted by a weaker yen.
The dollar won support from a rebound for US manufacturing, which helped turn attention back to US monetary policy, days ahead of the release of a closely watched jobs report.
Traders took the data as a sign that the world’s top economy is getting back on track and would be able to withstand an increase in borrowing costs.
The Fed had considered a rate hike last month but held off, saying it wanted to see more evidence of strength.
The IMF on Tuesday left its global economic forecasts unchanged into 2017 but called on governments to take action against the threats of low growth and protectionism.