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Sterling slides toward $1.21 on rising 'no-deal' Brexit fears

Key Points
  • By Tuesday afternoon, sterling had recovered slightly from its early depths to trade at around $1.2176, another 0.4% down on Monday's close, having fallen as low as $1.2120 overnight to reach its lowest level against the greenback since March 2017.
  • U.K. Prime Minister Boris Johnson's new team of ministers have been keen to espouse the message that the U.K. is now preparing for a no-deal Brexit, a move expected by many to be a "cliff-edge" scenario which could profoundly damage the British economy.

The pound plunged further toward $1.21 on Tuesday morning as rhetoric from Britain's new Prime Minister Boris Johnson heightened concerns that the U.K. could leave the European Union without a deal on October 31.

By Tuesday afternoon, sterling had recovered slightly from its early depths to trade at around $1.2176, another 0.4% down on Monday's close, having fallen as low as $1.2120 overnight to reach its lowest level against the greenback since March 2017.

Johnson's new team of ministers have been keen to espouse the message that the U.K. is now preparing for a no-deal departure, a move expected by many to be a "cliff-edge" scenario which could profoundly damage the British economy.

The prime minister said Monday that the current withdrawal agreement between Britain and the EU is "dead."

Sterling has fallen against the euro for 12 consecutive weeks, and the brief and tepid signs of a relief rally on Tuesday failed to dampen pessimism from analysts over the outlook for the pound.

Analyst reaction

Hamish Muress, senior currency strategist at OFX, told CNBC Tuesday that the tumble seen over the last few days is "just the beginning of sterling's potential weakness."

Muress projected that sterling may reach parity with the euro and could be much worse currently if traders weren't taking solace in the knowledge that the House of Commons still stands in Johnson's way, as a majority of representatives have vowed to block a no-deal Brexit.

"What happens when an unstoppable force meets an immovable object? A likely vote of no confidence and an early general election — a series of events that will cause even more woe for the pound," he added.

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BMO Capital Markets on Monday reduced its three-month and six-month outlooks for GBP/USD to $1.16 and $1.15 respectively owing to the risks of a no-deal Brexit and early elections, which its analysts suggested could come before year-end.

"Even in the unlikely scenario that Brussels is willing to reopen the Withdrawal Agreement, it is almost inconceivable that the U.K. government and Brussels will be able to reach a deal that could be ratified into U.K. law by October 31," BMO European Head of FX Strategy Stephen Gallo said in the note.

He added that even in the case of an extension to the deadline, the only plausible result would be a general election, and also pointed to potential easing measures from the Bank of England (BOE) as having a possible impact on the currency.

"We expect the BOE to reduce its benchmark rate by 25 (basis points) over the next six months, but we currently anticipate that a combination of looser fiscal policy and MPC (Monetary Policy Committee) efforts to cushion the fall in the GBP will slow the pace of weakness in the currency."

Gallo attributed sterling's climb off the bottom on Tuesday to foreign exchange investors attempting to "catch the bottom and profit from a short-term relief rally," but noted that the intensity of the bounce had been underwhelming.

Societe Generale macro strategist Kit Juckes shared the skepticism over Johnson's ability to get a fresh divorce deal agreed, suggesting the hardline stance the new prime minister is taking is an attempt to curry favor with voters previously lost by the Conservatives to the Brexit Party. He predicted that this approach will be "rebuffed aggressively."

"In the process, sterling moves to the bottom of its post-referendum ranges and re-tests historical trade-weighted lows," Juckes added.