LONDON • The pound may slide to a two-year low if a hardline Brexiter takes over as Britain's prime minister, with a bigger drop avoided on conviction that Parliament will foil any efforts to leave the EU without a deal.
Sterling could drop more than 2 per cent to US$1.24 in the event a eurosceptic such as front runner Boris Johnson replaces Mrs Theresa May after she formally stepped down as Conservative Party leader yesterday, according to a Bloomberg poll of 12 currency strategists. While the survey sees a hard Brexiter as the most likely scenario, with a 70 per cent probability, analysts expect lawmakers to provide a barrier against a no-deal exit.
The pound has slumped 3 per cent in the past month to trade around US$1.27 after a strong start to the year, and saw a record string of losses against the euro in May.
Its fortunes have ebbed and flowed since the 2016 EU referendum along with the chances of a Brexit deal. With Mrs May leaving after failing to get her pact with Brussels through a divided Parliament, some of her leadership rivals are trying to put a no-deal exit back on the table as they seek support from a eurosceptic Conservative Party.
"A PM who supports hard Brexit does not necessarily mean a hard Brexit being materialised," said Mr Petr Krpata, chief EMEA currency strategist at ING Groep. "There appears no majority in the Parliament for hard Brexit and also the PM, when elected, may loosen his or her current hard Brexit stance."
Apart from Mr Johnson, who has warned that the Tories face "extinction" if Brexit is delayed, prominent Brexiters in the race include former Brexit secretary Dominic Raab.
Other front runners, such as Environment Secretary Michael Gove and Foreign Secretary Jeremy Hunt, would be open to extending the deadline to leave the bloc beyond Oct 31. That scenario was also seen as likely by the 12 in the poll, and would drive the pound up to US$1.30.
The other currency-positive scenario would be for a Tory leader with a softer approach to Brexit, which is seen as less likely and would also lift the pound to US$1.30.
"We now see a rising chance that the UK will be compelled to ask the EU for a further delay to Brexit," said Mr Mark Haefele, global chief investment officer at UBS Wealth Management. "This would raise the probability of a snap general election or second Brexit referendum."
While most candidates are keen to avoid the Brexit impasse leading to an election, following a drubbing for the Tories in last month's European parliamentary vote, an election victory for the opposition Labour Party is seen as the worst scenario for the pound, driving sterling down to US$1.20.