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

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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