Pound steadies after recent slump

Prime Minister Theresa May Image copyright AFP
Image caption Brexit dominated Prime Minister's Questions

The pound has recovered some of its recent losses, with analysts attributing the gains to the promise of a Commons debate on the Brexit process.

The pound closed 0.6% higher on Wednesday at $1.22. Against the euro, it rose nearly 1% to close at €1.11.

But the gains could prove short-lived. In Thursday's early Asian trade, it fell to $1.21 again.

Sterling's current slide began when Prime Minister Theresa May named a date for the start of the Brexit process.

On 2 October, she said the UK would trigger Article 50 of the Lisbon Treaty by the end of March 2017.

Traders have been selling the pound, fearing the impact of leaving the single market.

According to figures from the Bank of England, on Tuesday the pound fell to its lowest level in history on a trade-weighted basis.

The trade-weighted index measures the pound against a basket of currencies, adjusted to reflect the importance of nations as trading partners.

'Shift in tone'

MPs have been demanding to scrutinise the eventual plan to leave the European Union before it is finally agreed, and on Wednesday the government agreed there should be a "full and transparent debate".

But it added that the process should not "undermine" the government's negotiating position.

"After weeks of tough rhetoric pushing sterling into a trading environment closer to an emerging market currency, the government may aim to stabilise markets, with its rhetoric and suggestions now possibly shifting in tone," said Morgan Stanley's head of currency strategy, Hans Redeker.

"However, there is a fine line to walk as [Mrs] May's Conservative Party wants a clean split from Europe.

"In addition, giving in too much, even before Article 50 negotiations have started, shifts the negotiation advantage towards the EU. Hence, the pound's rebound should be limited and followed by a decline," he added.

'Should I change my pounds to dollars now?'

Who's afraid of the falling pound?

Ahmed: The pound's fall and why it matters

Viewpoints: How low can the pound go?

'Maximum access'

The subject of Brexit dominated the first Prime Minister's Questions since the end of the party conference season.

Mrs May told MPs any deal would aim for "maximum possible access to the single market", but added she was "absolutely clear that the British people" wanted "maximum control" over immigration.

Analysts warn that the uncertain political situation will continue to make the pound volatile.

"It would appear that trying to find a floor for the pound is going to be difficult in the short term, simply due to the amount of political uncertainty being generated on both sides of the Channel, as both sides dance on the edge of the volcano, in laying out their negotiating positions, which for now appear a long way apart," said Michael Hewson, chief market analyst at CMC Markets.

Shares slide

The FTSE 100 share index has fallen back after a recent strong run, which has been partly helped by the weaker pound.

It closed 47 points lower, a drop of 0.7% to 7,024.

The fall in the pound has boosted the FTSE 100, as many of the companies in the index generate most of their revenues abroad.

A weaker pound means overseas revenues are worth more when they are converted back into sterling.

On Tuesday, the benchmark index hit an intra-day high of 7,129.83, and on Monday it fell just short of registering a record close.

Image copyright Getty Images

Analysis: Kamal Ahmed, BBC economics editor

Why does the fall of the pound matter?

On the upside, it matters for exporters which are boosted as their goods are far cheaper on foreign markets.

It matters for multinational companies like pharmaceutical firms which earn much of their income in dollars. It matters for the tourism industry in the UK, as foreign visitors flock here for bargains and good value holidays.

On the downside, it matters for tourists travelling abroad who will find everything they buy much more expensive.

It matters for the food and fuel this country imports as it becomes more expensive. It matters for inflation, as the rise in import costs feeds through to businesses and the High Street.

And remember, it does not need much of a rise in inflation to wipe out real income growth, which at present is running at around 2%. If real incomes start falling, that is when the fall in sterling becomes a truly political issue.

Because the pound in your pocket will actually be worth less.

Read Kamal's blog in full

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