No-Deal Brexit Will Crash the British Pound
A surging U.S. dollar and political wrangling over Brexit could create the perfect storm for the British pound. According to a recent survey of major banks, no-deal Brexit could send the British pound to fresh 34-year lows.
Chance of No-Deal Brexit Grows
Britain’s chance of exiting the European Union (EU) without a new trade agreement is now 30%, according to a new survey of 13 banks conducted by Bloomberg. That’s more than three times higher than a similar poll conducted in February and the most likely outcome.
Survey respondents assigned a similar probability for a further delay to the exit date as well as the prospect of a general election being called before October 31. A new Brexit deal is the least likely outcome at just 15%.
After several delays, British and European Union leaders have agreed to delay Brexit until October 31. Some EU leaders wanted a much longer delay, with EU President Donald Tusk even suggesting that the U.K. could remain part of the bloc for up to a year. French President Emmanual Macron, whose approval rating at home has plummeted since being elected, recommended a stricter approach.
The delay is supposed to allow negotiators more time to ratify a withdrawal agreement after British lawmakers rejected all previous deals.
The extension was granted mere days after Boris Johnson was elected the new leader of the Conservative party. He replaces Theresa May, whose reign as prime minister was nothing short of a disaster. (Among May’s many ghaffs was calling a snap election in 2017, for no apparent reason, that diminished her party’s clear majority.)
Johnson was a key member of the Brexit camp and was among the favorites to lead the U.K. out of the European Union. But like many of his compatriots, he didn’t want the prime ministership after David Cameron resigned from his post. The Tories eventually settled on May.
No-Deal Brexit Will Devastate the British Pound
The British pound posted its biggest one-day loss in history following the 2016 Brexit vote. If October 31 comes and goes without a new agreement, strategists believe new lows are on the horizon.
According to the very same Bloomberg survey, a no-deal Brexit would knock sterling back a whopping 9% to $1.10 U.S., its lowest in 34 years.
The British currency is down more than 16% over the past three years. It had erased most of its post-Brexit slump by April 2018 before resuming its downtrend. Over the past 16 months, GBP/USD is down more than 14%.
At the start of Monday trading, sterling was down 0.1% to 1.2145.
The pound’s latest struggles come just as the U.S. dollar is heating up again. The DXY dollar index, which tracks the performance of the greenback against a basket of six peers including the pound, hit two-year highs last week.
Paradoxically, the dollar surged to two-year highs after the Federal Reserve voted to slash interest rates on July 31. A large minority of traders were hoping for a 50 basis-point reduction. Others were taken aback by the fact that two FOMC members voted against reducing rates all together.
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