Pound falls to two-month low on Theresa May's hard Brexit comments

Sterling has been knocked to a two month low after traders interpreted comments from Theresa May as confirming the government is continuing to direct the country towards a 'hard Brexit' from the European Union.

In a weekend interview with Sky News, the Prime Minister said the UK could not expect to hold on to "bits" of its membership after leaving the EU and that the aim of controlling immigration is non-negotiable.

May added that the government “will be setting out some more details in coming weeks as we look ahead to triggering Article 50”.

The pound fell as low as 1.2124 against the dollar, a level not seen since late October.

However, when asked about fall in sterling at just after noon on Monday, May appeared to backtrack by saying it was "wrong to say hard Brexit is inevitable".

Analyst Neil Wilson at ETX Capital said sterling is on the back foot as May's weekend comments "were taken as a sign the UK government would prioritise immigration controls over single market access.

"Domestic populist politics trumps the trade card for now, it seems and that is weighing on the pound," he added, noting that this was simultaneously giving a boost to the FTSE 100 in large part because of the weakness in sterling.

Joshua Mahony at IG said: "It is clear that all parties see single market access as being intertwined with the free movement of labour. Thus it appears that we are heading for a so-called ‘hard Brexit’ which heightens the negative impact upon businesses operating in the UK.

"With Article 50 set to be enacted in around three months, there is likely to be substantial noise coming from both side of this argument, sparking volatility and a great deal of uncertainty."

Since the Brexit decision, there has been a distinct relationship forming between sterling and comments from members of the government.

Wilson said politics was the key driver for the pound at the moment, adding: "Given the susceptibility of the pound to such remarks - which are liable to change and be contradicted by ministers and other officials over the coming weeks - we have to assume that there is going to be more volatility, which may include plenty of short-term upside in sterling - i.e. that it could easily bounce back to levels we've seen in the last two months as the tone of the argument swings away from today's hard Brexit talk, back to soft Brexit."

Jane Foley at Rabobank said that since October the sterling-euro rate has adopted a 'binary relationship' with Brexit-related news.

"On heightened fears of a hard Brexit, GBP would move lower and on evidence that access to the single market could be retained, GBP would tend to push higher. The reaction of GBP to May’s comments yesterday can thus be easily explained," she said.

"That said, despite its overnight weakness, EUR/GBP remains well below the highs of October. In part this is a function of a recent spate of reassuring UK economic data. It is also related to concerns regarding the European political situation."

But Craig Erlam at Oanda reminded investors that it would be wise to remember that the Brexit outcome "is not binary and the reality will fall somewhere in the middle. While most people are aware of this, markets can often be more irrational, particularly in the early stages".

He said he thought the government’s position was becoming quite clear and so while it may weaken further if economic data deteriorates, the pound "may become less sensitive to Brexit rhetoric going forward".