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British pound runs Brexit gauntlet
LONDON, Jan 18, 2019 (BSS/AFP) – The British pound shrugged off fast-paced
political drama this week, but faces sterner tests in the coming weeks and
months as Brexit takes shape, analysts warn.
Sterling, which slumped after Britain’s shock 2016 referendum to exit the
European Union, has only wobbled in response to recent turmoil over Prime
Minister Theresa May’s Brexit plans.
Markets remain fearful of a “no deal” scenario under which Britain reverts
to World Trade Organisation tariffs and increased barriers, sparking
widespread economic uncertainty.
However, such a development, which could potentially cripple supply chains
between Britain and the European Union, is not expected by many pundits.
“The chance of a no-deal Brexit — the worst case scenario for the pound
which would likely drag it down to the region of $1.10 — is for now priced
out,” said ActivTrades analyst Ricardo Evangelista.
– Humiliating defeat –
MPs gave May the heaviest drubbing in modern British political history on
Tuesday by rejecting the divorce deal by a stunning 432 votes to 202.
The currency briefly hit a near two-year low on Tuesday after the
humiliating parliamentary defeat.
However, the pound then bounced back as traders bet the vote reinforced
their view that there would not be a chaotic and disorderly “no-deal”
departure.
And the unit extended gains Wednesday as Conservative leader May survived
a no-confidence vote that was called by Jeremy Corbyn of the main opposition
Labour party.
Conservative MPs, with the vital help of Northern Irish allies in the
Democratic Union Party, rallied behind May — and her government won by 325
to 306 to avert the threat of a general election.
Some dealers are now betting that another referendum or an extension of
the time-frame for Britain to negotiate the terms of divorce with the EU
might be more likely than no-deal.
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“Parliament may soon be forced to come together to prevent the one thing
there is a majority for – stopping a painful no-deal Brexit,” cautioned
analyst JR Zhou at Infinox.
The pound nudged slightly lower early Thursday as May scrambled to swiftly
assemble a new Brexit strategy in cross-party talks, but recovered later in
the European session.
The pound sat at $1.2989 in Asia, while the European single currency stood
at 87.74 pence per euro.
May reached out to rival parties shortly after winning the no-confidence
vote — but Corbyn has rejected the overture until she rules out the
possibility of crashing out with no agreement.
Britain, the world’s fifth-biggest economy, splits from its main trading
partner at midnight on March 29.
– ‘Time is running out’ –
“Whatever happens over the next few days, time is running out,” warned ING
analysts James Smith and Petr Krpata in a research note to clients.
And markets have not yet factored in the possibility of another general
election — which could send the pound sliding once more.
“The additional uncertainty a snap general election would bring is one
event risk which still has the potential to significantly weaken the pound in
the near-term,” added MUFG analysts.
“Market participants will find it difficult to stomach the additional risk
of a left leaning Labour government alongside current heightened Brexit
uncertainty.
“If a snap general election is called, we believe the pound could fall by
around 3.0-5.0 percent.”
Since the referendum, the sharp drop in sterling has made imported goods
more expensive, and therefore pushed up UK annual inflation and prompted many
consumers to tighten their belts.
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