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Jul 30, 2019
Monetary | Pound Heads for Worst Slump Since 2016 as Johnson Sets Ultimatum
Pound Heads for Worst Slump Since 2016 as Johnson Sets Ultimatum
By
John Ainger
and
Charlotte Ryan
3-4 minutes
The pound has slumped almost 3% in the past four days. Photographer: Chris Ratcliffe/Bloomberg
Photographer: Chris Ratcliffe/Bloomberg
The pound headed for its worst run of losses in almost three years as investor concerns over a no-deal Brexit intensified. The
pound has slumped almost 3% in the past four days, with investors
pricing a higher chance of the U.K. crashing out of the European Union
on Oct. 31. As differences between the two sides increase, Prime
Minister Boris Johnson’s office said
the U.K. will push the EU to negotiate a better divorce deal while
preparing the country to leave the bloc without one if he fails.
“The
biggest threat to the pound for the remainder of this year is the risk
of an accidental no-deal Brexit,” Credit Agricole SA strategists,
including Valentin Marinov, wrote in a note to clients. “We continue to
estimate a long-term fair value for pound-dollar that is consistent with
a disruptive Brexit outcome of around 1.20.” Sterling dropped as much as 0.8% to $1.2119 and fell 0.5% to
91.64 pence per euro on Tuesday. Benchmark gilt yields fell one basis
point to 0.64%, while the FTSE 100 Index of stocks held near the highest
level since August 2018. The yield on Ireland’s 10-year bonds
climbed five basis points to 0.20%, a two-week high, as investors sought
a higher risk premium on the nation’s securities. Citigroup strategists
including Jamie Searle recommend selling the debt versus its Belgian
counterpart as a hedge against a Brexit no-deal outcome.
Stephen Gallo, European head of FX strategy at BMO Capital Markets, discusses his outlook for the pound.The
last time the pound had this large a four-day losing streak was in
October 2016, when the currency slumped as much as 6% to $1.1841 in a
one-minute window. That flash crash was thought to have been caused by a
mistaken currency order, after then Prime Minister Theresa May
announced plans to trigger Britain’s withdrawal from the EU. It
looks increasingly likely that the pound will revisit that post-Brexit
low over the summer, according to Lee Hardman, a currency analyst at
MUFG. “Recent price action supports our view that financial markets had
not fully adjusted to price in the rising risk off a no-deal outcome.” The market will also have to contend with the Bank of
England’s policy decision on Thursday, and sterling could face further
pressure if the central bank strikes a more dovish tone. Money markets
are pricing a more than 60% chance of a 25-basis point rate cut by
December on concern that Britain could exit the EU without a deal. — With assistance by James Hirai
(Updates with increase in Irish bond yields.) Source: Bloomberg
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