Sterling to tumble further as no-deal Brexit worries intensify

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Sterling to tumble further as no-deal Brexit worries intensify
BATH, ENGLAND - OCTOBER 13: In this photo illustration, the new £10 note is seen alongside a US dollar bill on October 13, 2017 in Bath, England. Currency experts have warned that as the uncertainty surrounding Brexit continues, the value of the British pound, which has remained depressed against the US dollar and the euro since the UK voted to leave in the EU referendum, is likely to fluctuate. (Photo Illustration by Matt Cardy/Getty Images)

Sterling will continue its losing streak and tumble further as a no-deal Brexit becomes increasingly likely, a Reuters poll of foreign exchange analysts has found.

Read more: Sterling resumes fall as Brexit debate takes bizarre turn

The pound will slide beyond recent two-year lows against the dollar to trade between $1.17 and $1.20. It slumped as low as $1.208 at the start of the week but has risen slightly today to $1.217.

Traders are increasingly fearful that new prime minister Boris Johnson could take Britain crashing out of the European Union on 31 October without a deal. He has made clear that the UK will leave by that date “come what may”.

Most analysts and traders think such an exit would be economically damaging. The government’s budget watchdog has warned that even in a relatively benign no-deal scenario public borrowing would have to rise by £30bn a year to cover tax shortfalls.

The median forecast for the chances of a disorderly Brexit rose to 35 per cent in the latest Reuters poll of economists, the highest since the poll began two years ago. 

Yet a strong majority of economists polled still think Britain and the EU will reach an agreement.

Foreign exchange traders, however, seem less optimistic. They have sold sterling sharply, causing it to fall 2.75 per cent against the dollar since Johnson became PM on 24 July.

Johnson has repeatedly said he will not talk to the EU until it removes the so-called backstop from the deal previously agreed between the two sides. The backstop prevents a hard border returning to the island of Ireland.

The EU has said the backstop is non-negotiable, however, leaving the two sides deadlocked.

“We remain of the view that threatening no deal will achieve little in terms of encouraging the EU to make substantive changes to the withdrawal agreement,” said Andrew Goodwin, chief UK economist at Oxford Economics.

“But, with no opportunity for parliamentary moves against no-deal until early September, there is a distinct possibility that sterling could fall further in the interim.”

Evangelos Assimakos, investment director at Rathbones Edinburgh, said: “Sterling largely remains hostage to uncertainty around Brexit.”  

“Until Parliament resumes and we get an indication as to the likelihood of a no-deal Brexit, concerns will continue and the pound will likely stay depressed.”

Read more: Sterling tumbles again on Fed rate cut and no-deal fears

Goodwin said: “However, if the government does achieve an orderly Brexit, the elimination of no-deal risk should see sterling strengthen and renew the downwards pressure on inflation.”