Sterling would weaken considerably against both the dollar and euro if Britain left the European Union without a deal, according to strategists in a Reuters poll, with many saying the pound could reach parity with the common currency.
The pound had its biggest monthly loss against the euro in two years in May and also lost against the dollar, whacked by risk aversion amid the Brexit impasse.
It is still unclear how, when or even if Britain will leave the EU almost three years since Britons voted in a referendum to part ways. The two sides are currently due to divorce on Oct. 31, later than the original March 29 deadline.
If the country leaves without a deal, foreign exchange strategists polled by Reuters on May 30-June 5 were almost unanimous in saying the pound would tumble.
Currently hovering around $1.27, median forecasts said cable would trade between $1.15-$1.20 within a month following a no-deal Brexit. Two said it could go as low as parity to the dollar.
On Wednesday one euro was worth about 88.6 pence, but the median trading range was 91-96p in a no-deal scenario. Almost half of respondents said the euro could strengthen to one pound or beyond.
“The risk of a no-deal Brexit is rather limited in reality but it would be catastrophic if it actually happens,” said Everett Brown at IDEAglobal.
Boris Johnson, a former London mayor who was the face of the official 2016 campaign to leave the EU, is favourite to replace Theresa May as British prime minister. May announced last month she would quit the top job over her failure to deliver Brexit.
Johnson, who served as foreign minister in May’s cabinet until his resignation last summer over her Brexit proposals, takes a more hardline stance on the issue and has said Britain must leave the EU on Oct. 31 “deal or no deal”.
Still, Reuters polls of economists taken since the June 2016 referendum have consistently said the two sides would part ways with a deal agreed and median forecasts in the wider poll of around 60 strategists predict that sterling will strengthen.
One pound will be worth $1.27 in a month, in six months it will get you $1.30 and in a year will be over 5% stronger at $1.34. But that is still well below the $1.50 where it was trading before the June 2016 referendum to leave the EU.
“We still see an orderly Brexit resolution in 1H20 as more likely, hence we remain bullish on sterling in the medium term,” Morgan Stanley strategists told clients in a note.
Those median forecasts are a touch weaker than those given a month ago. The downgrade for sterling comes despite growing expectations that the U.S. Federal Reserve will soon follow other central banks and start cutting interest rates.
In contrast, the Bank of England was still narrowly expected to raise borrowing costs early next year in a Reuters poll taken last month.
The European Central Bank’s interest rates are going nowhere anytime soon, another Reuters poll found, and its next move will be to tweak its forward guidance to more easing.
So it was a similar strengthening story against the euro. The one, six and 12-month forecasts were 88.0p, 86.3p and 86.0p respectively.
Polling by Sumanto Mondal and Manjul Paul; Editing by Ross Finley and Gareth Jones
Source: UK Reuters