Britain’s currency sank to a two-year low last week, dipping below $1.24 as fears of a no-deal Brexit grew. Long seen as a symbol of Britain’s stability and national pride, the pound has in recent years become a barometer for concerns about the country and its departure from the European Union.
A cheaper pound could invite more foreign investment and tourism, but it could also hurt the country’s ability to buy goods from other places, especially at a time when it will need to negotiate trade treaties.
The currency’s fluctuations look set to continue. On Tuesday, the successor to the current prime minister, Theresa May, will be announced. If Boris Johnson, a hard-line Brexit supporter, is chosen, that raises new questions about how smooth the country’s exit will be.
Why is the pound so low now?
Since May, when the beleaguered prime minister announced that she would be stepping down, the prospect of Britain crashing out of the European Union — leaving without an agreement on the terms of divorce — has started to look more likely.
That has been hurting the pound: Many in Britain fear that a so-called no-deal Brexit would create chaos, and Britain’s Office for Budget Responsibility said last week that it would cause a 30 billion pound hit to public finances.
On Thursday, British lawmakers passed a measure intended to prevent the next prime minister from suspending Parliament and forcing through a no-deal Brexit. (Mr. Johnson had hinted he might take such a step.) Still, the uncertainty over the next few months is likely to drive down the pound.
The pound is about 15 percent lower than it was just before the vote to leave. But it is still above the lows it hit in January 2017, when Ms. May suggested that Britain might leave the E.U. without firm agreements. The prospect of losing tariff-free access to Europe’s single markets and the continued uncertainty about the terms of Britain’s departure caused the currency to plunge.
Analysts say the pound could go as low as $1.10. Last week, analysts at Morgan Stanley even raised the possibility that if Britain crashed out of the European Union, the pound could reach parity with the dollar.
Why is sterling a Brexit barometer?
Though the pound is viewed as a symbol of the country’s independence, it has at times been beholden to international events.
Plunges in the value of sterling have cast long shadows. The financial crisis in 2008 prompted it to plummet. The day that Britain had to withdraw the pound from the European Exchange Rate Mechanism in 1992 is known as Black Wednesday. In 1976, Britain had to ask the International Monetary Fund for a loan after the pound dropped below $2.
At the same time, many of the companies on Britain’s benchmark equities index, the FTSE 100, make a lot of their money overseas. So their stocks rise when the pound gets weaker, as the money they make is worth more in pounds.
With all the uncertainty about Brexit, Britain itself feels less steady. And the pound reflects that, complicating the jobs of currency analysts. “In the past, people would assume the U.K. government was relatively stable,” said Lee Hardman, a currency analyst at MUFG, the Japanese bank. But events like Brexit and the election of President Trump created much more global uncertainty.
“Brexit risk is the dominant driver,” he said.