Wednesday 28 August 2019 1:12 pm

Sterling could hit 35-year low on no-deal Brexit worries, City analysts warn

City economists have warned that the pound could tumble to a 35-year low against the dollar of close to parity as no-deal Brexit fears mount over Prime Minister Boris Johnson’s suspension of parliament.

Read more: Boris Johnson asks Queen to suspend parliament

Sterling traders have reacted badly to the news that Johnson has asked the Queen to suspend parliament for five weeks until 14 October, in what critics have called a bid to push through a no-deal Brexit. The PM has said it merely gives him a chance to outline his “very exciting agenda” for the new parliament.

The pound has shed 0.7 per cent against the dollar to trade at around $1.221 on the news that Britain is a major step closer to a no-deal exit from the European Union. It has dropped 0.6 per cent against the euro to levels around €1.101.

“The message to the UK government from sterling markets is clear: any steps that take the UK out of the EU without a deal on 31 October will result in a sharp sell-off in the currency,” said Viraj Patel, FX and global macro strategist at investment startup Arkera.

Despite the sterling fire sale, Panmure Gordon chief economist Simon French warned “it would be wrong to think that today’s moves are fully factoring in a no-deal outcome”.

Should a no-deal Brexit start to look certain, “we could see sterling trading down towards its all time low of 1.08 versus the USD – a level hit 34 years ago”.

Martin Beck, lead UK economist at Oxford Economics was even more pessimistic about the pound’s chances. “There is little prospect of any sterling recovery until the Brexit outcome becomes clearer, while a no-deal Brexit may see the pound drop close to $1.05.”

Currency caveats

Rupert Thompson, head of research at investment firm Kingswood, said today’s slide in the pound had to be considered against the gains it made following Johnson’s meetings with EU leaders in France over the weekend.

“Today’s slide merely takes the pound back down to $1.22 from the high of $1.23 earlier in the week and leaves it comfortably off the low of $1.20 touched earlier this month,” he said.

Ruth Gregory, senior UK economist at Capital Economics, pointed to high levels of uncertainty: “We probably won’t know for sure if the UK is heading for a no deal Brexit until the moment it actually happens.” She added: “We’ve learnt over the past few years not to rule anything out.”

Nomura FX strategist Jordan Rochester said he does not “expect this fall in GBP to extend into a new trend”. He said MPs have a chance to stop no deal before the suspension and to the fact that “the market is already short GBP”.

Nonetheless, the London economics team at Investec agree with French that in “a more disorderly scenario” sterling could hit $1.08. “Under a more managed no-deal, sterling might slide by less, perhaps to $1.16,” they said.

Read more: Brexit: Sterling sinks as Boris Johnson asks Queen to suspend parliament

Patel said “sell-on-rallies” were likely to persist if the government maintains its “‘whatever it takes’ approach” to Brexit. This “will make it difficult for any investor to take a constructive view on the currency,” he said.

(Image credit: Getty)