Sterling has fallen to its lowest point in over two years against the dollar after ministers in Prime Minister Boris Johnson’s new government made clear they were now assuming a no-deal Brexit.
The pound had fallen 1.1 per cent against the dollar to buy $1.225 by 2pm UK time.
It had also fallen one per cent versus the euro to buy €1.101, making Britons’ holidays more expensive.
A falling pound has helped lift the FTSE 100 benchmark stock index, however. It makes large companies’ foreign earnings worth more and exporters’ goods more competitive.
The FTSE 100 had risen two per cent by 2pm to around 7,700, and was also boosted by excitement over mergers and acquisitions.
Investors are selling the pound after the chances of a no-deal Brexit – which most analysts think would be economically damaging – rose dramatically with the election of Johnson by Tory party members as the new PM on Tuesday.
A brutal reshuffle saw Johnson put prominent Brexiteers in some of the most important jobs in government. The new ministers have been briefing the media that planning for no deal is the government’s number one priority.
This morning, foreign secretary Dominic Raab said the UK is “turbo-charging” its preparations to leave the European Union without a deal.
Raab told BBC Radio 4’s Today programme: “We want a good deal with EU partners and friends but that must involve the abolition of the undemocratic backstop.”
The backstop is the mechanism in ex-PM Theresa May’s deal that would prevent a hard border from returning to the island of Ireland. Brexiteers say it means Britain would have to follow EU rules indefinitely.
Michael Gove, now overseeing Brexit preparations as head of the Cabinet Office, wrote in the Sunday Times yesterday that the EU was unlikely to re-enter negotiations, and so the new administration would “operate on the assumption” of no deal.
“Sterling has cracked, opening up fresh lows versus the dollar, and it may now be heading for $1.21 or even $1.20 again,” said Neil Wilson of Markets.com.
“It increasingly looks like the Boris Johnson government is embarking on an overt policy of brinkmanship.” He said Johnson wants to take Nigel Farage’s Brexit Party out of the equation and force the EU back to the negotiating table.
Wilson said data shows “speculators are continuing to add to their short positions on sterling”.
Strategists at JP Morgan said in a note they were “bearish” on the pound, expecting it to fall.
“The Brexit saga is set to recommence and the road ahead looks difficult,” they said. “Dialogue with the EU is ongoing but is likely to prove fruitless, and may segue into a general election and subsequent extension of Article 50 later this year.”
Jordan Rochester, foreign exchange strategist at Nomura, said: “I’ve been surprised by the weakness of the pound over the past two days and the pace of the move given Johnson as PM should have been baked in the cake and most of the negatives were already known.”
He said for the “doomsday narrative” to be turned around “we need to see the EU provide Johnson something new to work with,” but said this was “not forthcoming thus far”.