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Abu Dhabi, UAESunday 16 December 2018

Pound falls against dollar after setbacks for Brexit deal

Analyst fears sterling is in a 'death spiral' as it falls to 17-month low after Theresa May suffers defeat in Parliament

The pound has been trading at about US$1.27 amid doubts amid British political uncertainty. EPA
The pound has been trading at about US$1.27 amid doubts amid British political uncertainty. EPA

Britain's currency fell to a 17-month low against the dollar after a chaotic day at Westminster which saw Prime Minister Theresa May’s Brexit plans suffer several setbacks.

The pound was down 0.5 per cent on Wednesday morning, at $1.2685, having dropped briefly to $1.2659 – its lowest point since June 2017 – overnight.

The currency surged nearly 1 per cent on Tuesday after the EU’s top court indicated Britain could unilaterally reverse Brexit. However, these gains were quickly erased after MPs said the government must publish its full legal advice about Mrs May’s deal with the EU.

Mrs May was defeated on a further two votes on Tuesday, one giving Parliament the potential to decide on a “plan B” if her Brexit proposal is voted down.

The pound has been trading at about US$1.27 amid doubts about next week’s vote on the deal, with strategists surveyed by Bloomberg predicting it will fall to US$1.25 if the plan is rejected by MPs. It had surged above US$1.31 in early November before the Brexit deal being agreed with the EU.

Sterling is down about 15 per cent from its level before the June 2016 Brexit referendum.

A Bank of England analysis predicted the currency could crash another 25 per cent to below parity with the dollar in a “disorderly” Brexit scenario.

ThinkMarkets FX analyst Naeem Aslam said the pound was in “death spiral mode”.

"The force of gravity is pulling it down and the price has broken a critical level of 1.27 against the dollar,” Mr Aslam said. “The doors are wide open for the price to touch the level of 1.25 again.”

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He added: “The higher odds of no Brexit deal are creating more uncertainty among traders. If the UK comes out of the EU with no deal, it would be nothing short of a catastrophe.

“The Bank of England and the Treasury have already raised several warnings about this. Just to put things in perspective, the housing sector could see the prices fall as much as 30 per cent and the pound could fall to 1.22 against the dollar.”

Elsewhere on Wednesday, Asian markets dropped after the biggest slide in stocks on Wall Street since mid-October. Stocks fell in Japan, Korea, Australia and Hong Kong.

However, US futures were looking brighter after China officially echoed US President Donald Trump’s optimism about trade talks.