Sterling fell to its lowest levels on Monday since the October flash crash on expectations that British Prime Minister Theresa May will outline plans for a "hard Brexit".
The British currency bottomed at $US1.19 on Monday, a 2.5 per cent drop, following stories in several UK newspapers on Sunday that indicated the prime minister will use a speech on Tuesday to outline that immigration control is her key priority as she negotiates for the UK to exit the European Union.
Of particular concern was the belief, bolstered by comments from British Chancellor Philip Hammond, that the UK is willing to leave the EU even if it does not reach an agreement to access the single European market.
"That was something new and contributed to the sell-off," said Elias Haddad, a senior currency strategist at the Commonwealth Bank.
Ray Attrill, global co-head of foreign-exchange strategy at National Australia Bank, said that, regarding Brexit, the UK "can't have its cake and eat it too".
He said that the newspaper reports indicated that Britain will not respect decisions made by the European Court of Justice. That, he said, would be hard to reconcile with hopes of a drawn-out, "slow" Brexit. "It could be not only hard, but sudden."
Pressure on the pound comes from other factors as well, added Mr Haddad. He cited expectations that interest rates in the UK will go "even more negative" (that is, will fall even further behind the inflation rate) combined with the "UK's large current account deficit will keep the pound down not just against the US dollar but against all currencies".
But Kit Juckes, a macro strategist at French investment bank Societe Generale, expected the pound to shrug off Monday's low, saying in a briefing note that the heavy sell-off was a "knee-jerk negative reaction", and that a move even lower would require "harder evidence of economic weakness".
The FTSE100 - the UK's index of blue chip stocks - has risen almost 4 per cent in the past month, and futures indicated it would trade higher on Monday. This is because many of the UK's largest companies derive much of their revenues from overseas. A falling currency would see the value of their earnings in sterling rise.
This mechanism could help buoy the British economy through the difficulties of a hard Brexit.
On the other hand, the associated economic upheaval could cause havoc for the UK's large financial sector. "There are competing influences, the question is which one of them will be the overriding one," says Attrill. "Obviously, to date, the positive effect of a weaker pound on earnings has been dominant.
"But it's a pretty hostile business environment for the time being."
Complicating matters is an expected ruling from the UK's Supreme Court on whether the government needs the broader approval of parliament to trigger Article 50 - which facilitates the country's exit from the EU. A ruling is expected this month or next.
The prime minister's office is preparing to brief London's major banks in a bid to smooth out the situation, according to Bloomberg. Treasury often conducts such briefings but it is unusual for the prime minister's office to do so.
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