Pound may slide to 2-year low with a Brexiter prime minister

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.
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.PHOTO: REUTERS

LONDON (BLOOMBERG) - The pound may slide to a two-year low if a hardline Brexiter takes over as the British prime minister, with a bigger drop avoided on conviction that Parliament will foil any efforts to leave the European Union without a deal.

Sterling could drop more than 2 per cent to US$1.24 (S$1.69) in the event a eurosceptic such as front runner Boris Johnson replaces Mrs Theresa May after she formally steps down on Friday (June 7), according to a Bloomberg poll of 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 stepping down after failing to get her agreement 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 NV. "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."

Conservative lawmakers will whittle down the field of 11 leadership hopefuls this month to a final pair voted on by party members. 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, who suggested he could suspend Parliament to force a no-deal exit - drawing a rebuke from Speaker John Bercow.

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 again beyond Oct 31. That scenario was also seen as likely by the 12 in the poll, with a two-thirds probability, 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, at a 30 per cent probability, 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, predicting that would see the pound trade in a range of US$1.28 to US$1.34. "This would, in turn, 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 Conservatives 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.

Whoever takes over from Mrs May will still have to deal with Brussels, which does not want to reopen the divorce talks. That is keeping many investors in UK assets on the sidelines, and is reflected in the survey seeing the pound anywhere between US$1.15 and US$1.40.

"The new prime minister will be facing similar problems," said Mr Jeremy Stretch, head of Group of 10 currency strategy at Canadian Imperial Bank of Commerce. "The range of expectations and outcomes are pretty broad and wide ranging so it makes it remarkably difficult to predict the pound."