(Adds Treasurer's comments, JPMorgan's forecasts)
By Anirban Nag and Kit Rees
LONDON Oct 3 Sterling slid towards a
three-decade low on Monday after Prime Minister Theresa May set
a March deadline for the formal departure process from the
European Union to begin, sending British shares to a 16-month
May told her Conservative Party's annual conference on
Sunday that she was determined to move on with the process and
win the "right deal", in a move to ease fears inside the party
that she might delay the divorce.
May said she would invoke Article 50 no later than the end
of March next year, referring to the EU's Lisbon Treaty that
formally puts the divorce proceedings between the EU and Britain
This means she kicks off the negotiations process before the
French and German elections next year and implies the two-year
Brexit clock triggered under Article 50 will wind down by March
2019, a year before Britain's next general election.
While the March deadline offers some clarity to the process
and underpinned stocks, many in the market worry that the
government's stance points to a so-called "hard Brexit" that
would see Britain left outside the single market in favour of
strict controls on migration.
The economy has shown resilience post-referendum, but fears
of a slowdown in business investment and the wider economy will
undermine the pound and raises the prospect of possible further
easing by the Bank of England in the coming months.
British finance minister Philip Hammond vowed to protect the
economy from any turbulence during the negotiations, assuring
businesses and consumers he would act if needed.
Sterling fell 1.3 percent to $1.2818, its weakest
since early July and not far from the 31-year low of $1.2798
struck on July 6, just days after the June 23 referendum on EU
membership. It hit a three-year low against the euro
"For market participants the key soundbite was that
regaining control over EU immigration into the UK would be the
priority ahead of membership of the single market," Shilen Shah,
bond strategist at Investec Wealth and Investment, said.
"Sterling has the potential to come under further pressure given
the probable stalling of foreign direct investments."
Investors worry a "hard exit" from Europe's single market or
what the Royal Bank of Canada dubbed as "Smexit" -- or
single-market exit -- would send Britain into a recession and
blow out its current account deficit, already among the highest
in the developed world. A wider current account gap and slowing
foreign investments tends to be a drag on the currency.
"May's stance is a reminder that uncertainties related to
"Smexit" turbulence could be costly for the economy in the short
run," Sam Hill, RBC Capital Markets senior economist, said.
STOCKS AND GILTS HIGHER
For now though, sterling's weakness has helped British
exports and the economy. Data released on Monday showed factory
activity grew at the fastest rate in more than two years last
month and suggested manufacturing growth in the third quarter
will be the strongest so far this year.
JPMorgan raised its forecasts for growth in the third
quarter and expects the British economy to expand at 1.3 percent
in 2017, compared with a previous forecast for 0.9 percent
The positive impact from sterling's weakness and the good
news from the manufacturing sector helped Britain's blue chip
FTSE 100 index reach its highest level since June 2015.
The index had fallen sharply just after the June vote, but
has since recovered 21 percent, thanks to its large number of
internationally facing companies that benefit when sterling
"As a result of Prime Minister May's announcement ... the
pound has weakened significantly, which is actually seen as a
good thing by the FTSE 100 as it's quite an export-heavy index,"
Henry Croft, Research Analyst at Accendo Markets, said.
British government bond prices gained while expectations
that the BOE could ease policy in February rose a tad, pricing
in the swaps market showed.
(Editing by Dominic Evans and Jane Merriman)