Pound will take Brexit beating, warns US bank

Political turmoil could give the pound a fresh battering this autumn as difficult Brexit talks resume and the Conservative party conference underlines Cabinet splits over Europe, a leading investment bank warned on Wednesday.

Bank of America Merrill Lynch is advising clients to bet against sterling as political headwinds “intensify” for the currency, which it predicts could fall to $1.24 against the dollar by the end of the year and as low as $1.10 if the UK crashes out of the EU without a deal.

Currency strategist Kamal Sharma stressed the slow progress made on Brexit talks, which are due to begin again at the end of the month. So far there has been no agreement on the crucial issues including the rights of EU citizens in the UK and vice-versa, the land border between Northern Ireland and Ireland and the UK’s final “divorce bill” for leaving the EU in March 2019.

Brexit Secretary David Davis (pictured) has said the UK will not commit to a final bill by the EU leaders’ summit in October, which would delay talks on a UK-EU trade deal.

“Given the lack of progress made in the three major areas of negotiations so far and being nearly six months into the negotiating period, we think that markets are unprepared for what could be a volatile end to the year,” he warned. Sharma, who also stressed that “politics more than data” mattered for the pound, added that “potential for heightened Eurosceptic noise around the Conservative party conference is a particular risk”.

The pound fell as low as $1.21 last October as Prime Minister Theresa May set out plans for a hard Brexit.

Merrill’s note added that the conference would be a “key test for party cohesion”, with “conflicting messages” from cabinet ministers over the summer.

Despite the warning the pound gained some ground, gaining 0.31 cents to $1.2897, as the currency reacted to a fall in the unemployment rate to a 42-year low of 4.4% in the quarter to June.

Wages also grew by 2.1% on last year, slightly stronger than expected albeit still slower than inflation, which stood at 2.6% in July.

If wages continue their recovery it could prompt the Bank of England’s rate-setters to plump for an earlier interest rate rise.