After hitting 20-month low, where is the pound heading?

London, United Kingdom – The pound remains weak after having fallen to a record 20-month low against the US dollar on Monday.

A few hours after markets opened on Tuesday, the pound had rebounded by about 0.4 percent against the dollar following a plunge of 1.7 percent the day before to about $1.2507, which took it to its lowest level since April 2017.

Other turbulence on Monday saw the euro – the official currency used by 19 of the 28 European Union  member states – surge 1.6 percent against the British currency.

The FTSE 100 – a share index of the 100 largest companies listed on the London Stock Exchange – closed 0.8 percent down.

The downturns were prompted by political uncertainty unleashed by British Prime Minister Theresa May’s decision to postpone a parliamentary vote on her widely criticised Brexit deal after it became clear she did not have enough support to win the poll.

Ahead of a rescheduled ballot to be held sometime before January 21, May has gone back to Brussels as part of a whistle-stop tour to visit several European leaders and seek renegotiated terms on the UK’s departure from the bloc.

However, EU officials have said they will not renegotiate the deal, which was brokered after months of negotiations between London and Brussels.

‘The clock is ticking on Article 50’ 

Analysts said the continued lack of clarity over the terms of Britain’s withdrawal and fears of a potentially catastrophic “no-deal” departure had spooked the markets and would prevent any major resurgence in the pound until the political gridlock had ended.

“The pound could be tracking this kind of level for a bit … it could carry on trading around the June 2017 low, that seems to be where the market is seesawing,” said Neil Wilson, chief market analyst at Markets.com.

“I don’t think anyone is really sure where we are going to go … but the clock is ticking on Article 50 and the markets are looking at an increased risk of ‘no-deal’ being priced in,” he added, referring to the exit clause in the EU’s constitution.

“If you’re an investor you look at the political uncertainty and you tend to run for cover a bit … the fear is ‘no-deal’ [Brexit] means significant disruption to trade, higher tariffs and therefore the pound has to weaken to counteract that, as the shock absorber for industry.”

The UK is due to leave the EU on March 29 next year, regardless of whether officials in London reach an agreement with their counterparts in the bloc or not. 

A “no-deal” scenario, which would see Britain exit Brussels’ orbit with no brokered agreement on the terms of its withdrawal or future trading arrangements, could cause major economic shock.

The Bank of England, the UK’s central bank, has warned that leaving the EU without a withdrawal agreement could see the country’s gross domestic product (GDP) shrink by up to eight percent.

The government, meanwhile, has forecast a potential economic slump of more than nine percent in a no-deal scenario.

And the International Monetary Fund, for its part, has cautioned that leaving the EU in a disorderly fashion would have “substantial costs for the UK economy”.

UK economy slows 

Jonathan Portes, a professor of economics and public policy at King’s College London, said it was important to note that while the fall in the pound was of symbolic significance in revealing market fears over a no-deal Brexit, its “bottom hasn’t dropped out”.

“One percent is not something anyone ought to get terribly excited about and frankly we should be more worried about the fact the economy seems to be slowing quite significantly,” he said.

“And that if this uncertainty continues it will have actual negative effects on the real economy, business investment and consumer confidence.”

Figures published by the UK’s Office of National Statistics on Monday showed Britain’s economy had slowed between August and October, the latest timeframe for which such data is available.

GDP grew by 0.4 percent in the three months to October, a fall on the 0.6 percent growth registered in the three months to September.