The pound slid 1 per cent on Monday to below $1.23 as prime minister Boris Johnson’s new government signalled the rising likelihood of a no-deal Brexit.
Sterling fell to $1.2260, a level not touched since mid-March 2017 in the aftermath of the triggering of Article 50. The pound was 0.9 per cent lower against the euro at €1.1030, its lowest level since January.
Downing Street added to the air of pessimism when it said Mr Johnson would not meet EU leaders to discuss a revised deal unless they accepted his preconditions: that the withdrawal treaty be reopened and the controversial Irish backstop scrapped.
Mr Johnson’s spokeswoman said he would not sit down to be “told that the EU cannot possibly reopen the withdrawal agreement and that is the message he has been giving to leaders when he has spoken to them on the telephone so far”.
The prime minister has yet to speak to Irish prime minister Leo Varadkar since he entered Downing Street last Wednesday, nor has he accepted invitations to meet French president Emmanuel Macron and German chancellor Angela Merkel.
Mr Johnson’s aides fear that if he carried out a tour of European capitals the meetings would be presented in other EU capitals as him being rebuffed. His first scheduled meeting with Mr Macron and Ms Merkel is at the G7 summit in Biarritz in late August.
Mr Johnson, speaking on a visit to Scotland, insisted he remained “confident we will get a deal”.
“I don’t want to exaggerate this…to be absolutely clear the formal position of the EU is unchanged,” he said. “But I think they understand that the UK and the EU are two great political entities and I’m sure it is possible for us to come up with a new deal that will be to the benefit of both sides and that’s what we are aiming for.”
Asked about Downing St’s preconditions for negotiations, he said: “We are not going to be standoffish…We are going to reach out, we are going to engage,”
There was also notable demand for the relative safety of UK government debt, pushing the yield on gilts lower. Two-year gilt yields fell 4.2 basis points to 0.44 per cent, to the lowest since January 2018.
Benchmark 10-year gilt yields fell 5.6 basis points to 0.632 per cent, the lowest since late 2016.
The pound has fallen 1.4 per cent to leave it the worst performing major currency since Mr Johnson entered Downing Street on Wednesday and promised “no ifs or buts” that Britain would leave the EU on October 31 as he unveiled a cabinet packed with hardline Brexiters.
The deepening pressure comes after members of the new cabinet talked up the probability of a no-deal exit, which is widely expected to be economically damaging.
Deutsche Bank strategist Jim Reid pointed to weekend comments from cabinet member Michael Gove, who said the government was now “working on the assumption of no-deal”.
“No deal is now a very real prospect,” Mr Gove said, writing in the Sunday Times.
On Monday, Dominic Raab, the foreign secretary, said “the balance has shifted” towards a no-deal exit, but added “there is a deal to be done” if the EU reopens the withdrawal agreement for renegotiation.
The pound is having one of its worst months since the Brexit vote in June 2016 triggered a sharp fall in the currency. It is down 3.4 per cent so far in July, as traders and investors have repriced the chances of a disruptive exit under Mr Johnson. It has notched up a string of unwanted records, and has been the worst performer against the US dollar over the past one, three and six months.
ING’s currency strategists said: “With the new government rhetoric on the hard Brexit firming and the rising likelihood of early elections, sterling should remain under pressure.”
The next milestone on sterling’s descent against the dollar comes at $1.2106, which it touched during intraday trade on March 14 2017.
Traders’ expectations for volatility in sterling increased further on Monday. Contracts in the options market which pay out if sterling fluctuates over the next three months have risen to their highest level since early April, when former prime minister Theresa May negotiated a six-month extension to the original departure date.
London’s FTSE 100 was energised by the pound’s decline, heading for one of its biggest rallies of the year with a rise of almost 2 per cent, enough to send the main UK stock index to its highest level since August 2018. The index is home to a range of multinational companies. Their overseas earnings are flattered when repatriated into the pound, while the goods and services they export are more competitively priced when sterling falls.
Additional reporting by Mure Dickie in Edinburgh