Image (C) Pound Sterling Live, still courtesy of Sky News.
- Tough talk around Brexit purely political
- Incoming Prime Minister likely to adopt more sober tone
- Pound can fall another 10-15% in 'no deal' Brexit
The British Pound is likely to find some stability once the abrasive rhetoric that has characterised the Conservative leadership race has passed, and a more constructive stance on Brexit is adopted by the incoming Prime Minister we are told.
However, should the tough rhetoric deliver a 'no deal' Brexit, then Sterling could slump another 10-15% says a fund manager at the UK's largest mutual insurer.
The tough talk around Brexit from the two main conservative party leadership candidates which has dragged Sterling to 6-month lows is like something from the surreal, alternate reality world, of the ‘looking-glass’, says Trevor Greetham, head of multi-asset allocation at Royal London Asset Management.
“Well it reminds me of Alice in Wonderland. When Alice says ‘I can’t believe in impossible things’ and the Queen says ‘I tried for half an hour a day when I was younger and sometimes I believed 6 impossible things before breakfast,’” says Greetham.
First, “we are being told that the UK will leave before the 31st of October,” then, “that there will be a renegotiation where the Irish backstop is removed entirely,” and finally, “that there is a one in a million chance that we will leave with no-deal,” says Greetham in an interview on Bloomberg TV.
The rhetoric coincides with another push lower in the main Sterling exchange rates, with the Pound-to-Euro exchange rate falling to fresh seven-month lows this week at 1.1047.
The Pound-to-Dollar exchange rate has meanwhile triggered fresh two-year lows at 1.2382.
According to Royal London, the bluster around Brexit is mainly political in nature and designed to win them the leadership election.
“The whole thing is just utterly inconsistent and I think this is all about choosing the Conservative party leader,” says Greetham.
Once a new leader is in place and they are faced with the “cold hard realities” of Brexit their tune will probably soften, with the inference that Pound Sterling could find its feet.
Even in a worst case scenario in which the UK really did look like it was leaving without a deal on October 31, Parliament would probably mobilise and wrest control from the executive to prevent the UK rolling over a cliff-edge. The Pound would then probably recover from whatever depths it had fallen to, says the asset manager.
Greetham does not place a very high probability on the UK leaving without a deal but it is still a possibility and there could be further deep declines in Sterling if this were the case.
“Of course we could leave with no deal on the 31st of October. I think it would be chaotic. I think it would be very damaging for the UK and European economies, and it would result in a 10 or 15% slide in the Pound. But the more likely that prospect becomes the more likely it is, i think that Parliament will take control,” says the asset manager.
The anti-Brexit campaigner Gina Miller recently said the chances of a second referendum were virtually nil but Royal London’s Greetham does not agree.
“I think Gina Miller is putting too low a probability on the second referendum. Because I think if Parliament wants to take control and get this thing sorted, it may well be the only way to unblock the situation is to have another referendum. And if the markets get a hint that that might be happening then the Pound is going to go up,” says the fund manager.
Boris Johnson and Jeremy Hunt have shifted increasingly further towards hard Brexiteer positions in a bid to win votes in the Conservative leadership campaign.
In a recent television interview they both said they would get rid of the Irish backstop, effectively rendering useless the withdrawal agreement already drawn up with the EU.
The Pound bucketed on the news, with losses accelerating on the revelation that Boris Johnson's team are exploring ways to ensure Parliament is suspended around the crucial exit day in October.
Yet whilst Alice could not believe in ‘impossible things’ the advice from Royal London’s Greetham is to take the advice of the Queen of Hearts since impossible things could still happen.
“Hedge all of your bets. On sterling in particular, because And so you have got this knife-edge move on the Pound. The GBP/EUR has almost been like this pegged currency for 3 years, it can go down 10 or 15% or up 10 or 15% if Brexit were cancelled. And you have to treat it like an emerging market currency and be very careful about your exposure,” says Greetham .
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