Sterling rout not yet over as no-deal Brexit odds firm
Sterling fell to a low against the dollar not seen since early 2017 at the start of August and analysts expect it will drop further
Sterling’s recent slide is not yet over as the chances that Britain and the EU part ways without a withdrawal deal have jumped again after arch-Brexiteer Boris Johnson took over as prime minister last month, a Reuters poll found.
Mr Johnson, who was the face of the leave campaign ahead of the 2016 referendum and who took office on July 24, has repeatedly said he will take Britain out of the EU on October 31 with or without a deal. Sterling fell to a low against the dollar not seen since early 2017 at the start of August.
Before that divorce date arrives, the pound will fall further and trade between $1.17 and $1.20, a Reuters poll of foreign exchange strategists predicted, below the $1.21 it was at on Wednesday.
“Fears of a no deal Brexit are likely to worsen, though we anticipate it will be avoided. Our official house view is that there will be a delay, but kicking the can down the road doesn’t ease uncertainty,” said Jane Foley, head of FX strategy at Rabobank and the most accurate forecaster for major currencies in Reuters FX polls last year.
Britain was originally due to leave the EU at the end of March but the departure date was extended.
The median forecast for a disorderly Brexit - whereby no deal is agreed - jumped in an August 2-7 Reuters poll of economists to 35 per cent, up from 30 per cent given in July and the highest since Reuters began asking this question two years ago.
Forecasts in this poll ranged from as low as 15 per cent to a high of 75 per cent.
“Until now, it was difficult to know what a Johnson-led government would do about Brexit, given his indecisiveness, unpredictability and, at times, conflicting messages on Brexit,” said Daniel Vernazza, chief international economist at UniCredit.
“However, it now seems pretty clear that Boris Johnson’s strategy is to try to force through a no-deal Brexit on October 31,” Mr Vernazza, who does not expect Mr Johnson to succeed, added.
Economists in Reuters polls since the June 2016 referendum have consistently warned a no-deal Brexit would be the worst outcome for Britain’s economy.
But as they have since late 2016 when Reuters first started asking about the most likely eventual outcome, a strong majority of economists polled still think the two sides will eventually settle on a free-trade deal.
Again in second place was the more extreme option of leaving without a deal and trading under World Trade Organization rules.
The third most likely outcome was Britain remaining a member of the European Economic Area, paying into the EU budget to maintain access to the Single Market yet having no say over policy. Fourth place once more went to cancelling Brexit.
With a deal expected, median forecasts in the wider poll of over 50 forex market watchers gave a healthier outlook for sterling and it was expected to have rallied to $1.27 in six months and then be trading 10 per cent higher at $1.33 in a year.
Against the euro, which may struggle as the European Central Bank is expected to ease policy in September, the pound will also gain ground. On Wednesday, one euro was worth about 92.1 pence but in a year, the poll said it would drop to 87.1p.
Brexit worries and a US-China trade war have increased concern about a global downturn and Britain’s economy has struggled to gain traction.
Growth flatlined last quarter, the poll predicted, and the economy will expand only 0.3 per cent per quarter through to the end of next year, a touch weaker than predicted last month.
However the country will probably dodge a recession - the median likelihood of one within a year was put at 35 per cent and at 40 per cent for one in two years, up five percentage points each from last month.
Other major economies are being supported by central banks easing - or about to ease - policy. But the Bank of England is not expected to change its key rate until 2021.
At its policy meeting last week the Bank lowered its growth forecasts due to increased Brexit worries and a slowing global economy, but stopped short of following other central banks and considering an interest rate cut.
Only 12 of 55 economists polled with a view on Bank Rate expected a cut this year or next and 19 had an increase pencilled in.
“While the buoyant wage growth backdrop means it is too early to be talking about Bank of England rate cuts, the increasingly uncertain Brexit outlook means it is very unlikely that policymakers will be looking at tightening policy in the foreseeable future either,” said James Smith, developed markets economist at ING.
Updated: August 9, 2019 02:52 AM