The pound looks set for another battering ahead of Theresa May finally setting out her Brexit plans, which appear to embrace a ‘hard’ exit from the European Union.
The Sunday Telegraph reports the Prime Minister will say in a keynote speech on Tuesday that the UK should make a clean break from the EU - taking Britain outside the single market and Customs Union, and therefore able to fully control immigration.
The early reaction from the markets suggested traders were spooked by the news:
In early trading in New Zealand, the pound dropped below $1.20 for the first time since the October “flash crash”, falling as much as 1.6 percent to $1.1986 in Auckland on Monday. On that day, the pound was as low as $1.1841 - the lowest level since 1985.
May has demurred from the term ‘hard Brexit’, and blamed the media for over-interpreting her comments to Sky New’s Sophy Ridge last week, which caused the pound to nosedive against the dollar and the euro.
Sterling fell markedly after her speech at the Conservative Party conference in October when the term ‘hard Brexit’ started to gain currency.
Sterling is down against the dollar by about 19 percent since the Brexit vote.
According to reports, City analysts are already anticipating Tuesday speech with a sense of gloom.
“Early indications suggest single market access is unlikely to be retained - a headline which could send GBP sharply lower,” says Viraj Patel at ING in London, according to Pound Sterling Live.
“Hard-Brexit fears plus weaker UK data points to a test of the 1.20 level.”
The Sunday Times reported that Downing Street staff expect the speech to cause a “market correction” that could lead to a fresh fall in the pound.
May is expected to say that while people may have had different views about the EU referendum, many more share a common view of the kind of Britain they want to build in the future.
And in setting out the Government’s plan for the Brexit negotiations, the PM will highlight the importance of building on common goals – such as protecting and enhancing workers’ rights - and focusing on a positive vision of Britain outside the EU.
According to the Sunday Telegraph, the speech may suggest:
Britain should be prepared to leave the customs union to secure free trade around the world;
That the UK should have full control of its borders even if that means ending single market membership;
And that Britain no longer be bound by European Court of Justice rulings - despite previous claims to the contrary.
While a clean break from the EU risks making trade with the bloc more costly, and risks a City exodus, staying in the customs union would prevent the UK from lining up free-trade deals with countries outside the EU such as the US and China.
Meanwhile, Chancellor Philip Hammond has suggested Britain could become a corporate “tax haven” if the EU blocks access to the single market.
Hammond told the German newspaper Welt am Sonntag that the UK would consider abandoning European-style taxation and regulation systems to “become something different”.