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Thu 19 Jul 2018 10:42 AM

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UK pound may slump again in the event of a no-deal Brexit

Sterling could drop by as much as 8 percent against the dollar if the UK doesn't clinch a deal with the EU by March 29

UK pound may slump again in the event of a no-deal Brexit
The pound could fall to $1.15, according to Mizuho Bank and MUFG, the most bearish of seven forecasters.

Tumbling out of the European Union without a deal in hand could cost the pound dearly.

Sterling could slump as much as 8 percent against the dollar if the UK doesn’t clinch a deal with the EU by March 29, when the nation is slated to leave the bloc, according to a survey of analysts.

That would mirror the 8.1 percent drop the pound saw on June 24, 2016, the day after Britain voted to leave the union.

A no-deal Brexit is still regarded as a somewhat low-probability outcome, with the poll assigning a 20 percent chance to it.

The pound could fall to $1.15, according to Mizuho Bank and MUFG, the most bearish of seven forecasters who took part in the Bloomberg survey. The median was for a decline to $1.20, while, the most optimistic outlook was for a loss in value to $1.25, which is more than 4 percent below the pound’s level of $1.3050 Wednesday.

Markets unruffled

More than two years after Britain voted itself out of the EU, the two sides are yet to reach an accord and the contentious issue is routinely plunging Prime Minister Theresa May’s government into crisis.

Still, markets seem unruffled, with option volatility in the pound lingering near the past year’s average and the euro-sterling exchange rate stuck in a narrow range since late last year.

“The risk of Parliament rejecting any deal put in front of them late in 2018, or early in 2019, is increasing,” said John Wraith, head of UK macro rates strategy at UBS Group AG. “This puts both the agreement on future relationships and the transition period after the end of March 2019 in serious jeopardy. If the prospect of no deal gains momentum, there’s bound to be bigger moves ahead.”

UBS sees the risk of Brexit without a deal increasing as May’s proposals stretch the fragile political alliances she has struck over the course of her leadership to breaking point.

The prime minister told a lawmakers’ committee Wednesday that the government will be stepping up efforts to increase public awareness about preparations for a no-deal scenario.

RBC Europe sees “substantial repricings” in UK assets depending on how the political process goes, while BlueBay Asset Management said it was surprising that volatility wasn’t higher.

How likely is a no-deal outcome?
The survey assigns a median probability of 20 percent to such a scenario, with Societe Generale SA’s Kenneth Broux pegging it between 40 percent and 50 percent After May’s government narrowly defeated the amendment to keep the UK in the customs union if no deal is reached.

“The perceived probability or fear of no deal will be higher in the short run and that uncertainty will be priced into the pound to a degree,” said Viraj Patel, a currency analyst at ING Groep NV.

Where will the pound go?
Should Britain leave the EU without an accord, the pound would initially plummet and “hit new post-referendum lows,” said Neil Jones, Mizuho Bank’s head of hedge fund sales.

He sees sterling falling to $1.15 but adds that “the sell-off will not last. The pound will recover and trend higher over time”

A no-deal scenario isn’t currently priced in by the market, so “I would anticipate at least a reaction to the extent we saw after the referendum,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG.

Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion Bank in London, said that the UK currency could slide on a no-deal outcome “with the market starting to move when negotiations begin to break down when there are only a few weeks to go”

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