Sterling hits three-year low against euro on Brexit worries

Sterling slid to a three-year low against the euro on Monday after British prime minister Teresa May pledged over the weekend to trigger the start of Brexit negotiations before the end of March.

While most European markets, including Dublin, ended the session little changed or lower, the FTSE 100 index surged 1.2 per cent to close at its highest level since May of last year. The London market’s heavyweight exporters are seen benefitting from sterling weakness.

The euro advanced by 0.8 per cent to 0.873p by the end of trading in Europe, while the dollar surged 1.1 per cent to 0.779p.

"This current bout of sterling weakness is not ideal for Irish exporters," said Justin Doyle, a senior foreign exchange trader at Investec in Dublin, adding that if the British government's "speedy Brexit rhetoric picks up", it could push see the euro touch 88p for the first time in three-and-a-half years.

Unexpected rush

“With this unexpected rush to press the Brexit button, we should definitely see UK sentiment surveys begin to deteriorate again next month,” he said, adding that there is a chance the euro could test the key psychological 90p level by the year end.

London's blue-chip equities index, the FTSE 100, stood out as a strong spot in the European market, with big beneficiaries of sterling weakness such as Guinness's owner Diageo, which rose 1.6 per cent, pharmaceutical stocks and oil companies all in demand.

BP and Royal Dutch Shell added at least 1.8 per cent, while GlaxoSmithKline gained 1.3 per cent and Vodafone rose 1.4 per cent.

Irish-publicly quoted companies with high UK revenues, including cider and beer maker C&C, insulation panels maker Kingspan, Bank of Ireland and ferry operator Irish Continental Group, have highlighted the headwinds caused by sterling weakness in recent months, following the UK vote on EU membership on June 23rd.

The Iseq index of Irish shares closed 0.04 per cent lower at 6,032, with Bank of Ireland, which has about 40 per cent of its loan book in the UK, and Fyffes each falling 1.1 per cent.

Exposed economy

The Republic is widely seen as being the most exposed economy in Europe to a “hard Brexit”, which Ms May hinted at in her speech to the Conservative Party conference during the weekend.

She said the UK would not accept any limits on its ability to control immigration in negotiations to leave the EU, which would make it difficult for Britain to maintain access to the European single market.

Brexit "is going to be a drawn-out process", said Eugene Kiernan, head of investment strategy at Appian Asset Management in Dublin, adding that it will have different implications for different industries and companies.

Data published on Monday showed that the UK manufacturing sector continued to expand in September, after falling sharply in the wake of the Brexit vote.

However, in the past week alone, Japanese carmaker Nissan said that it may rein in investment in the UK, while outsourcing firm Capita warned that many of its customers are delaying making investment decisions – as a result of Brexit.

“If the UK economy slows down, it’s going to be investment driven,” said Mr Kiernan.