Pound’s fate could worsen as investors see multitude of risks with May, Brexit

125bf0df95b1140 - Pound's fate could worsen as investors see multitude of risks with May, Brexit

4ac93ac368474c23a80b9d197ba9b12dmnzdrpiopvk - Pound's fate could worsen as investors see multitude of risks with May, Brexit

Related Articles

Pound rebounds after Brexit upheaval rout

Stocks mixed as trade stress simmers; pound steady

European stocks rise at open; pound recovers

WATCH: Wall Street rallies but Brexit roils pound, European markets

Brexit turmoil hammers pound but stocks hold steady

Pound tumbles, gilts rally as UK Brexit Secretary steps down

 

Pound traders are faced with several scenarios as political turmoil surrounds UK Prime Minister Theresa May, and few look positive.

With this week’s events suggesting May’s Brexit plan doesn’t have strong support, investors now wonder what the premier’s next move will be if her deal is rejected in Parliament. May’s options include negotiating another deal with the European Union, holding a second Brexit referendum or even a general election, all as she faces the possibility of a no-confidence vote in her leadership.

Any of these events would make reaching a divorce agreement between Britain and the EU by year-end extremely difficult and the pound could plunge to $1.20, according to Credit Agricole SA. BlueBay Asset Management and Aberdeen Standard Investments are among those who are similarly pessimistic on the currency’s outlook.

“The chance of the existing deal going through looks low,” said Mark Dowding, a money manager at BlueBay, which oversees the equivalent of $60 billion. “In the short term, a no-deal probability will rise.”

Sterling steadied Friday after dropping more than 2% at the peak of the UK political drama a day earlier. The pound could slide when trading resumes in Asia Monday should 48 Tory MPs submit letters of no-confidence in May. Her determination to stay as PM seemed to reassure the market in the short term, but longer term, the Parliamentary vote on the Brexit deal remains the key hurdle.

Brexit Pressure Valve

BlueBay’s Dowding is short pound versus both the euro and dollar, and is also short gilts on the view a significant collapse in the British currency would hit all UK assets. Sterling could reach $1.20 in a very short time if the deal doesn’t pass the lawmaker hurdle, said Credit Agricole’s Valentin Marinov.

“Given that the currency markets are the most liquid asset at investors’ disposal, shorting the pound could become the path of least resistance or, if you wish, the Brexit pressure valve, for many clients,” said Marinov, head of Group-of-10 currency strategy at the French bank. “This could mean that the drop toward $1.20 may take less than a week.”

The market has turned more bearish on the burgeoning UK political crisis, with demand for options to sell the pound climbing to the highest since 2016. James Athey, a money manager at Aberdeen Standard, which oversees $736 billion, said he exited his long position in pound-dollar Thursday morning as the political turmoil clouded the short-term outlook for the currency.

Woodman Asset Management AG’s foreign-exchange strategist Bernd Berg is even more negative on the pound. He sees it sliding almost 14% to $1.10, a level not reached since 1985, if a second vote on Britain’s membership of the EU is called.

“A second referendum would add a significant period of additional uncertainty, and if we head toward it, the pound will head to $1.10,” Berg said Thursday.

* : SUBSCRIBE TO NEWSLETTER

You May Also Like