Morgan Stanley sees the pound falling to as low as parity with the dollar if Britain exits the EU without an agreement
The pound and gilt yields slid to multi-year lows as UK Prime Minister Boris Johnson stepped up preparations for a no-deal Brexit with just about three months left until the nation exits the European Union.
Sterling tumbled the most among the Group-of-10 currencies as various members of Johnson’s top team took a tough stance. UK Chancellor Sajid Javid said he was stepping up Treasury preparations for no-deal and top aide Michael Gove wrote in the Sunday Times that the government was “working on the assumption” the talks with the EU would fail.
Johnson, a former mayor of London, is seen as more likely to try to push through a no-deal Brexit than his predecessor Theresa May and Morgan Stanley sees the pound falling to as low as parity with the dollar if Britain exits the EU without an agreement.
“Sterling should remain under pressure and head toward $1.20 levels over the coming months if early elections materialize and the Conservative party under PM Johnson runs on a ticket of a divisive Brexit stance versus the EU," said Petr Krpata, a currency strategist at ING Groep NV.
Sterling slid as much as 1.1% to $1.2244 in London, the lowest level since March 2017. It weakened 1% to 90.80 pence per euro. The yield on U.K. 10-year government bonds fell as much as six basis points to 0.63%, the lowest level since August 2016.
The prime minister told reporters on Monday that a no-deal departure from the EU was “absolutely not” the assumption but said it was still responsible to prepare for that outcome.
Johnson continued to say that the Irish border backstop plan is "dead." His comments came after Irish Foreign Minister Simon Coveney reiterated Friday that the Brexit withdrawal agreement, in which the backstop plays a key part, was closed. The market has shifted to price in around a 50% chance of a no-deal Brexit from around 20% previously, according to Mizuho Bank’s head of hedge fund currency sales Neil Jones.
The FTSE 100 Index of stocks surged as much as 2.2%, the most since January, on conviction a weaker pound will boost the earnings of export-reliant companies.