The pound has sunk to a three-year low against the euro on worries over the UK’s prospects outside the EU, after the government set a timetable for Brexit negotiations and fanned fears it would go for a deal that leaves Britain excluded from the single market.
Sterling came under pressure on Monday after Theresa May used her weekend speech at the Conservative party conference to pledge to trigger article 50 before the end of March. The prime minister raised the possibility of a hard Brexit as she spelled out that greater border controls would trump any attempt to remain a member of the single market.
That pushed the pound down sharply against the euro single currency to €1.1438 in afternoon trading, a drop of 0.9% on the day. The pound was also down more than 1% against the US dollar to $1.2835, not far off a 31-year low hit in the wake of June’s shock referendum result.
Sterling’s weakness contrasted with a rally on stock markets where share prices were lifted by a combination of near-term economic optimism, relief over May providing some certainty on Brexit timing and the effects of a weak pound, which flatters the earnings of UK-listed firms reporting in dollars.
“Brexit continues to be the word of the day, with the markets somewhat caught between the future consequences of Britain’s separation from the EU and the lack of discernible impact in the past few months,” said Connor Campbell, analyst at the financial spread betting firm Spreadex.
“While the FTSE is celebrating the UK’s recent, and unexpected, economic sturdiness, the pound has its eye on a time when Britain officially no longer belongs to the European Union.”
The FTSE 100 index of bluechip shares rose more than 1% to a 16-month high of 6,996.The more domestically focused FTSE 250 was also up, by 1.6% at 18,152, boosted by a surge in the shares of Henderson, the fund manager, which announced a merger with the asset manager Janus. Henderson shares were up 17% at 271p.
The mood was further bolstered by a poll of manufacturers that suggested factory activity expanded at the fastest pace for more than two years in September, helped by stronger export orders on the back of the pound’s fall after the EU referendum. The survey chimed with other recent reports suggesting businesses and consumers have largely recovered from the initial shock of the Brexit vote in June.
The key index on the Markit/Cips UK manufacturing PMI (pdf) rose to 55.4 from 53.4 in August, beating forecasts for 52.1 in a Reuters poll of economists and the highest since June 2014.
The survey also showed manufacturing production expanded at the quickest pace since May 2014, employment rose for the second month running and new orders picked up thanks to higher sales to domestic and overseas clients. New export orders grew at the fastest pace since January 2014 as the weak pound continued to make UK goods more competitive overseas.
The flipside of the weaker pound was further upward pressure on import costs for manufacturers and they passed part of that on in higher prices last month.
Rob Dobson, senior economist at IHS Markit, which compiled the survey, said the latest improvement in the PMI report from its post-referendum low in July was encouraging for overall growth prospects.
“The rebound over the past two months has been encouragingly strong, and puts the sector on course to provide a further positive contribution to GDP in the third quarter,” he said.
The survey follows official figures last week showing stronger-than-expected growth after the referendum in the services sector, which accounts for about three-quarters of the economy. Other official data also showed the economy went into the vote with slightly faster growth than previously thought.
The chancellor, Philip Hammond, seized on signs of economic strength in his address to the Conservative party conference in Birmingham.
“The markets have calmed since the referendum vote. And many of the recent data have been better than expected. That is the clearest demonstration of the underlying strength of our economy,” he said, without referring to the pound’s fall.
Currency traders had more long-term concerns on their minds as they digested the prime minister’s weekend comments, said Chris Saint, senior analyst, at City firm Hargreaves Lansdown Currency Service.
“Sterling’s woes are being compounded by speculation the UK could take the hard Brexit route, sacrificing access to the EU single market in return for greater control over immigration,” he said.
There were also fresh warnings about reading too much into early signs of resilience to the referendum outcome. Statisticians have cautioned against reading too much into any single month’s data and point out that figures can get revised over time as more information comes in. Economists warn that various factors could soon weigh on spending power and sentiment.
“Notwithstanding the stronger-than-expected run of economic data thus far, we expect that consumers, who until now have remained resilient in the face of Brexit, may struggle to maintain their optimism in the face of rising inflation and a softer labour market,” said Dean Turner, economist at UBS Wealth Management.