Pound may fall to parity against euro

Pound may fall to parity against euro

By Tommy Wilkes, Ritvik Carvalho, and Tom Fin

Having sunk to 13-month lows, sterling could fall by up to another 10% in the coming months should Britain crash out of the EU without a deal on future trade ties, luring more speculators to bet against the currency.

Sterling lost almost 2% last week, with the latest move lower being kickstarted by UK trade minister Liam Fox’s warning that, with Britain less than eight months from its scheduled EU departure date in March, there was a 60% chance of leaving without a deal.

The moves were certainly exacerbated by a big and broad dollar rally, and the pound has since clawed back the worst of its losses against the euro. In markets troubled by the financial crisis facing Turkey, sterling was little changed against the euro, at 89.32 pence.

But the worry, say analysts, is that in the absence of any conclusive developments towards a deal over the coming months, the pound’s spiral will accelerate while the clock ticks down on the deadline and hedge funds are tempted into betting against the currency. And muddying the horizon are major political events —UK prime minister Theresa May’s Conservative Party conference in early October, and meetings of EU leaders in late September and then mid- October.

“There’s no guaranteed date for when Brexit progress or hard Brexit will be known by, apart from exit day on 29 March, 2019,” Nomura analysts told clients, describing a hard Brexit as a “cliff edge” moment in which Britain crashes out of the EU in March 2019 without any future trading arrangements in place.

“We find that we are very much in the early stages of pricing for a hard Brexit,” they said.

Most economists still believe Britain will reach a deal with the EU. But the latest Reuters polls indicate risks of no deal have risen to 25% from 20% in July. Some bookmakers price even higher odds, above 40%. If that comes to pass, Britain’s currency would crash to $1.20, from today’s $1.2750 levels, the Reuters poll showed, a fall of around 6%. But sterling is forecast to rise to $1.34 by end-January if an agreement is reached. Others predict more precipitous falls — Commerzbank sees a 10% drop against the dollar and euro. That would leave the pound close to parity with the single currency, below post-Brexit referendum lows of 94 pence.

The slump in the Turkish lira has come as a reminder of what can happen to currencies. The currency has lost more than 40% against the dollar this year, largely due to worries about president Tayyip Erdogan’s influence over the economy, his repeated calls for lower interest rates, and worsening ties with the US.

- Reuters

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