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- Analysts say 'no deal' would see sharp falls in Sterling
- "Investors should not be complacent about the threat of a no-deal exit": UBS
- However, consensus still expect 'no deal' to be avoided
A new poll of foreign exchange strategists shows that many would expect the Pound to fall to equal value against the Euro, and even the U.S. Dollar, in the event of a 'no deal' Brexit taking place on October 31.
In the event of a 'no deal' Brexit, foreign exchange strategists polled by Reuters on May 30-June 05 were almost unanimous in saying the Pound would fall significantly from current levels.
Almost half of respondents said the Euro could strengthen to one Pound or beyond.
The median trading range in a 'no deal' scenario was 1.04-1.10.
In an interesting development, two strategists also believe that the Pound would fall to parity against the U.S. Dollar in a 'no deal' scenario.
Parity against either the Euro or U.S. Dollar would represent a historical all-time low for the Pound.
"The outlook for UK politics clearly remains highly charged. The result of the Tory leadership election are expected in July. If the new leader sees a 'no deal' Brexit as a live option in October, GBP can be expected to weaken," says Jane Foley, a foreign exchange strategist with Rabobank in London. "On a 'no deal' Brexit we see potential for GBP/USD to plunge to the 1.10 region and for EUR/GBP to push towards parity."
For foreign exchange markets, all eyes are turning to Boris Johnson, the current favourite to become the next UK Prime Minister, and his strategy to deliver Brexit.
Johnson has warned this week that the Conservative party faces an "existential crisis" if it does not see Brexit through by October 31, ruling out a snap general election, a second referendum or a further delay to the UK’s exit from the EU.
The comments confirm the prospect of a 'Brexit at all costs' on October 31 is a prospect foreign exchange traders must seriously consider.
According to Oddschecker, who scan the betting market and collate the odds on offer at the UK's leading bookmakers, Johnson was 7/4 favourite at the start of the week before going 6/4 on Tuesday before odds fell further to reach 10/11 by mid-week.
"Investors should not be complacent about the threat of a no-deal exit, which we believe would take the Pound as low as USD 1.15 and 0.97 versus the Euro," says Mark Haefele, Global Chief Investment Officer GWM at UBS. "Given the difficulty of predicting the outcome, we do not recommend strong directional trades on Sterling."
A EUR/GBP exchange rate at 0.97 gives a Pound-to-Euro exchange rate of 1.03.
The Pound has been in a virtual free-fall against the Euro since early May, falling from the upper 1.17s at the start of the month to the current mid-1.12s seen at the present time.
The falls come as foreign exchange markets reposition for the growing prospect of a 'no deal', while the potential for further significant political turmoil is also seen increasing as it could be that a new Conservative leader is left with little choice but to call a snap General Election.
"For GBP, ongoing uncertainty is a significant headwind," says Daniel Been, FX Strategist with ANZ. "Brexit policy will be absolutely critical and whoever assumes the role will need to secure broad party support. That is what has plagued Brexit so far. Visions of post-Brexit Britain differ greatly. The current favourite for the role is Boris Johnson, who doesn’t want a no-deal exit but advocates tougher negotiations."
The prospect of a Corbyn-lead Government remains high according to current polling data, presenting an uncertain outlook for the UK economy as he has promised to hit the middle classes with higher taxes and embark on a programme of nationalisations should he win the levers of power.
"The most likely outcome, in our view, is another hung parliament, probably led by Labour. There is a serious risk of further political instability as the search for coalition partners proves challenging and possibly even fruitless," says Brian Hilliard, Chief UK Economist with Société Générale.
While strategists maintain expectations for parity in GBP/EUR on a 'no deal', it must be said that the base-case scenario of the majority of analysts is that a 'no deal' will ultimately be avoided.
This explains why consensus forecasts at the world's leading financial institutions suggest Sterling will actually end the year higher against the Euro than current levels.
The three-month consensus is for 1.15, the six-month and 12-month consensus is 1.16.
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