British Pound Faces 'Record Lows'
- Written by: James Skinner
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Image © Pound Sterling Live
- Record lows await GBP/EUR in event of 'no deal'
- GBP/USD would see lowest level since 1984 following a WTO exit.
- Liberal Democrats top latest YouGov poll
Pound Sterling is facing more losses and could easily see record lows before the year is out according to strategists at Rabobank, who say the game of Deal-or-No-Deal among Tory leadership candidates and a growing risk of a general election could weigh heavily on the British currency this summer.
"The outlook for UK politics clearly remains highly charged. The first major focus for GBP investors will be the Tory leadership election, the result of which are expected in July. If the new leader sees a 'no deal' Brexit as a live option in October, GBP can be expected to fall towards the December low," says Jane Foley, a strategist at Rabobank in London.
The call comes as the Pound endured losses through the course of May as market expectations for a disruptive Brexit outcome grew after it became clear Prime Minister Theresa May's Brexit deal would not be passed through Parliament.
The Pound-to-Euro exchange rate exchange rate has fallen 3.66% in May while the Pound has fallen 4.25% against the Dollar over the same period.
The Conservative Party leadership race is widely expected to dominate market focus over coming weeks.
"In our view GBP remains vulnerable in the near-term to fears that the new PM will take a more hard line on Brexit," says Foley.
MPs will whittle down the current sizeable field of candidates down to a final two through a series of votes with the final two being put before the wider party membership who then choose the leader.
It is believed most Conservative Party MPs are opposed to a 'no deal' Brexit with parliamentarians lining up in their greatest numbers behind MPs who oppose such an exit from the EU, while grassroots members back those candidates perceived as most likely to pursue excactly that kind of departure.
According to the Conservative Home website, Jeremy Hunt - who opposes a 'no deal' - has the backing of most MPs, while polling of Conservative Party members suggests Boris Johnson is the favourite.
Pound Sterling and financial markets would not take kindly to a 'no deal' advocate making it through to the final choice of two, as that candidate would be likely to win the ballot of party member.
While a 'no deal' exit would would end the subordination of UK institutions to those of the European Union but mean defaulting to doing business with the bloc on World Trade Organization terms, which many economists and analysts say would be economically damaging and result in sharp declines in Sterling.
Indeed, Foley says there is a chance the Pound-to-Euro exchange rate could trade at around 1:1, a record low, were a 'no deal' to take place.
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The Fight for 'No Deal'
The market does however appear willing to adopt a wait-and-see approach at the current juncture as there are multiple potential outcomes in play, including the government being brought down and a General Election being triggered as MPs seek to avoid a 'no deal'.
"In our view GBP remains vulnerable in the near-term to fears that the new PM will take a more hard line on Brexit. However, the risk that parliament will oppose a 'no deal' Brexit is likely to put a floor under GBP in the coming months," says Foley.
The UK parliament has indicated through a number of meaningful votes there is no majority for pursuing a 'no deal' Brexit with the opposition, as well as some from within the Conservative Party, saying they will attempt to bring down the government in a 'no confidence' vote if it pursues such a thing.
However, the Institute for Government recently released a report that says Parliament would in effect be toothless to stop a Prime Minister that is intent on pursuing a 'no deal' Brexit. Parliament has thus far successfully instructed the Government to seek delays to Brexit, but this door might be closed to them going forward.
Germany's government reportedly said Thursday it is ready to veto any request for a further extension of the Article 50 window unless the UK requests an extension to hold another referendum.
An extension would be necessary if parliament continues to reject Prime Minister Theresa May's withdrawal agreement while blocking a 'no deal' exit, which is another reason the risk of an election could be growing.
The only meaningful tool available to a Parliament opposed to a 'no deal' Brexit would to be pass a vote of no confidence in the Government and trigger a General Election.
"It looks like a near impossible task for MPs to stop a prime minister who is determined to leave the EU without a deal. Parliamentary procedure offers no route, and the only apparent way to blocking no deal – a vote of no confidence – would be a massive gamble for Tory MPs," says Maddy Thimont Jack, an analyst at the Institute for Government.
And it would take a mere handful of Conservative Party MPs to vote against their own government to bring it down.
"The Tory Party’s delicate working majority, which is dependent on the DUP, suggests there is risk that a deeply unpopular measure could indeed bring down the government," Foley says.
Chancellor Philip Hammond warned this week that he is willing to bring down the government if the next Conservative leader is determined to pursue a 'no deal' Brexit.
“I am very clear that the national interest trumps the party interest,” Hammond told Sky News.
How Low Can the Pound Go?
The loss of a confidence vote would be almost certain to mean a General Election which in itself poses a further cocktail of uncertainty that should keep the Pound under pressure.
"The potential for further losses is likely to depend on how much parliament looks likely to push back against a 'no deal' Brexit. This process, however, will be disrupted by Parliament’s summer recess which usually lasts from late July until early September. This means that the final weeks before the October 31 Brexit date are likely to be fraught with political tension and in the meantime GBP will be clouded by political woes," Foley warns.
Foley forecasts the Pound-to-Dollar rate will fall to around 1.10 - its lowest level since 1984 - in the event of a 'no deal' exit and that the Pound-to-Euro exchange rate would drop from 1.13 toward parity, in other words 1-for-1.
Liberal Democrats Could Win the Next General Election
The latest YouGov poll for The Times shows the Liberal Democrats would top the polls if a General Election were to be held now.
The pro-remain Lib Dems would receive 24% of the vote say YouGov who are widely held to be the most accurate pollster in the market, having almost perfectly called the final vote outcome in the just-held EU elections.
Our latest Westminster voting intention has the Lib Dems in first place and the Brexit Party second place, with Labour and the Tories pushed into third:
— YouGov (@YouGov) May 30, 2019
Lib Dem - 24%
Brexit Party - 22%
Con - 19%
Labour - 19%
Green - 8%
UKIP - 1%
Change UK - 1%
Other - 6%https://t.co/ueScgptCmg pic.twitter.com/cC1yg2bsmD
The Brexit Party polled at 22% while the Conservatives and Labour were tied on 19% with the Greens on 8%.
Additionally, the poll found that for nearly 70% of voters Brexit is now the most important issue facing Britain.
"Much of today’s poll findings will be the result of the immediate short-term impact of the European election results. The Liberal Democrats and Brexit Party have had a solid boost of publicity, look like winners and, perhaps most importantly, the election shows they are not wasted votes, one of the perennial obstacles for any challenger party," says Oliver Wright, Policy Editor at The Times.
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