Sterling drops on reports May will opt for ‘hard’ Brexit

The pound fell sharply during Monday’s Asian trading as the market waited nervously for a key speech by British Prime Minister Theresa May on Brexit later this week.  According to press reports, the UK would aim to abandon the EU’s tariff-free area in exchange for control over its immigration policy.

Pound / dollar fell below the psychologically important 1.20 level to trade as low as 1.1986; levels unseen since the October sterling flash crash.  The pound managed to reclaim the 1.20 level but sentiment remained bearish on the UK currency and May’s actual speech on Tuesday could drive it even lower if the press reports turn out to be true.

Euro / pound also benefitted from sterling weakness to climb to as high as 0.8851.  Against the euro and the dollar, the pound’s losses exceeded 1%.

In other currency pairs, dollar / yen dropped below the 114 handle to 113.61 before recovering to 114.04.  Dollar / yen’s drop had started from Friday and was not strictly related to the drop in the pound.  Gold also continued its upswing as it once again climbed above $1200 an ounce.  Therefore there was some turn towards safe havens such as the yen and gold, combined with ongoing profit-taking by dollar longs.

Looking ahead, it should be relatively quiet because of Martin Luther King holiday in the US.  Later in the day markets will await a speech from the Bank of England Governor Mark Carney on “Policy issues affecting the Bank of England” and his comments will be closely watched given the turmoil the pound is facing in FX markets.

by XM Research

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