Hard Brexit fears crunch sterling ahead of PM May speech

Britain's pound fell sharply on Monday as concern mounted that the country was heading for a "hard" Brexit from the European Union and its single market, a day before a speech by Prime Minister Theresa May on the government's plans.

Some British newspapers have billed May's speech on Tuesday as laying out potential major changes to its preferential single market access and hardening its stance toward an economic bloc that accounts for roughly half its exports and imports.

A spokeswomen for May, who will also attend a gathering of the world's economic elite in Davos, Switzerland, this week, called the reports about the planned tone of her upcoming speech "speculation".

That helped steady sterling in London trading but couldn't repair all the damage. The pound at one point dropped to a three-decade low against the dollar, barring its 'flash crash' in October, and as much as 2.5 percent against the Japanese yen. [/FRX]

"It���s clear that sterling is still very vulnerable to 'hard' Brexit fears," said Rabobank currency strategist Jane Foley. "The uncertainty is itself also a negative factor, and I think perhaps that���s one of the reasons for Theresa May���s speech on Tuesday, to provide a little bit of clarification."

With May expected to trigger Article 50 in March, which will start formal EU separation proceedings, the stakes are already rising.

British finance minister Phillip Hammond also gave a thinly veiled warning in a German newspaper interview at the weekend that Britain could use corporate tax as a form of leverage in Brexit negotiations.

"If we have no access to the European market, if we are closed off, if Britain were to leave the European Union without an agreement on market access, then we could suffer from economic damage at least in the short term," he said. "In this case, we could be forced to change our economic model."

However, he added that Britain did not want to close its doors completely to EU citizens who wanted to work in the UK.

Later on Monday, Bank of England Governor Mark Carney, who has delivered a string of warnings about the potential impact of Brexit, will give a speech at the London School of Economics on the policy issues affecting the bank.

The central bank cut British interest rates to a record low and pumped fresh stimulus into the economy shortly after the Brexit vote, but it is now seeing inflation accelerate as a result of sterling's slide.

The pound has fallen almost 20 percent against the dollar and nearly 14 percent against the euro since Britain voted to leave the EU. By 1115 GMT (6:15 a.m. ET) on Monday, it was down almost 1 percent on the dollar at $1.2060 and 0.6 at 87.80 pence per euro.

London's stock market continued to benefit, however: the FTSE was the only major European index not in negative territory. It has surged 25 percent since Brexit, partly because the slump in the pound helps internationally-spread companies that earn in dollars and euros.

Benchmark UK government bonds, gilts, also gained as a Europe-wide sell-off left investors moving into traditional areas of stability [GVD/EUR].

May has so far given very little away about what deal she will be seeking, frustrating some investors, businesses and lawmakers.

Tuesday's speech will stress the need for Britons, who voted for Brexit by 52 to 48 percent in last June's referendum, to unite around common goals such as protecting and enhancing workers' rights, her Downing Street office said in a statement.

"Now we need to put an end to the division and the language associated with it ��� 'Leaver' and 'Remainer' and all the accompanying insults ��� and unite to make a success of Brexit and build a truly global Britain," May is expected to say.

(Additional reporting by Jemima Kelly, editing by Larry King)