Sterling slid back below USD 1.23 on Tuesday as senior officials and investors pointed to the potential for more falls for a market still in shock after Friday’s 10-percent flash crash.
The past four days for the pound are now its worst since the aftermath of the vote to leave the European Union in June and Bank of England policymaker Michael Saunders warned a “bumpy” Brexit could sharply reduce British economic growth.
“Given the scale and persistence of the UK’s current account deficit, I would not be surprised if sterling falls further, but I am fairly agnostic as to whether any further depreciation is likely,” Saunders told lawmakers in a written submission.
Like other Bank of England officials, he also sounded sanguine on how the bank would react to further falls in the pound, saying it was likely to look through any impact on inflation. Former Governor Mervyn King told Sky News on Monday that the fall in the pound was a “welcome change”.
The pound was little moved by the comments, with dealers saying it was the now deep-rooted conviction that the government is on course for a “hard Brexit” in which Britain leaves the EU single market that drove morning sales in London.
After a steadier 24 hours, the pound slid 0.8 percent to USD 1.2260, pushing the Bank of England’s trade-weighted index to a nearly-eight-year low of 74.0.
It also weakened a third of a percent to 90.32 pence per euro.
Some traders cited a Financial Times report that Russian bank VTB may move its European hub to Frankfurt, Paris or Vienna as having added to worries of financial sector cutbacks in London due to Brexit.
Norway’s sovereign wealth fund, the world’s largest and a major owner of UK shares and government bonds, told Reuters that Friday’s flash crash was a correct move that reflected the expectations of the UK economy.
The major banks in general have stuck to forecasts of around USD 1.20-1.25 for sterling, but Friday’s shocking, apparently computer-trader-driven, 10-minute slide to a 31-year low of USD 1.1491 has some wondering if a drop closer to parity is not on the cards.
They wonder if Britain can continue to draw in the large net flows of capital it needs to fund its current account gap, equivalent to 6 percent of gross domestic product, if the economy suffers a downturn and firms relocate to Europe.
If it can’t, the pound may need to fall much further to slow imports and boost the competitiveness of exporters.
“Concerns surrounding our ever increasing current account deficit have reignited discussion around the widespread impact such a hole can create,” said Tobias Davis, head of corporate treasury sales at Western Union in London.
“Liquidity is also a cause for concern at present, highlighted by gaps in price action.”
Worried by the outlook for capital flows, Deutsche Bank strategist George Saravelos has been predicting sterling to fall to USD 1.15 since last year and he said the pound might now get there faster.
“If you look at yesterday or the day before, it can go very quickly now,” he said. “The basis for our forecast was the very bad flow picture in the UK, even without Brexit.”
“The more it becomes clear that the policy direction is going toward a hard Brexit and the faster the economic costs appear, the faster we are going to get there.”