Pound Balks at Government's 'No Deal' Brexit Guidelines

- Pound weakens after government releases "no deal technical notices".

- Pound now close to year-long lows against the US Dollar and Euro.

- Analysts say odds of "no-deal" are slim so is now time to buy Pound?

© Pavel Ignatov, Adobe Stock

The British Pound sold off close to year-long lows Thursday after the government published advice outlining how companies should respond to a "no deal Brexit" but some analysts say much of the Brexit bad news is already in the price, so is now a good time to buy Sterling?

The 25 documents published Thursday set out what will change if the UK leaves the EU without a deal on future trade ties and what measures the government is putting in place to cope with the fallout.

Among other things, the government has guaranteed all payments from the EU until the end of 2020 at least, regardless of what those payments are for, although some beneficiaries will have to ensure their claims are filed before the UK leaves the EU in March 2019. Farm subsidies are guaranteed for the life of the current parliament, which ends in 2022.  

Government says "the UK is currently a net contributor to the EU budget, and all EU funding is derived from funding by UK taxpayers," suggesting the guarantees themselves should be neutral for the public finances. In other words, they won't themselves require further borrowing than otherwise will have been the case. 

In addition, ministers have urged pharmaceutical companies to ensure they have at least an additional six weeks of stock in supply to prevent shortages in the event that a customs meltdown on the UK side of the border leads to delays getting imports into the country and onto shelves.

"This January provisional analysis estimated that in a no deal/WTO scenario GDP would be 7.7% lower (range 5.0%-10.3%) relative to a status quo baseline," says Philip Hammond, Chancellor of the Exchequer, in a letter to MP Nicky Morgan.

"Cross-Whitehall" analysis published in January claimed the UK economy would grow by 7% less than it otherwise would have during the 15 years after a "no deal Brexit".

The analysis estimates the economy would grow by a total of 16% during that time, averaging a little more than 1% each year, if the UK left the EU without a deal. But that it would have grown by a total of 25% during that time, averaging around 1.5% per year, if the UK did not leave the EU at all or if it remained inside the EU single market and customs union.

The Pound-to-Euro rate fell toward 1.10 following the papers' release, perhaps in acknowledgement of the allegedly rising possibility of a "no deal Brexit", and the GBP/USD rate declined toward 1.2800. Both are among the lowest levels seen since September 2017.

The notices follow closely behind multiple analyst suggestions that, save for a "no deal Brexit", a lot of the bad news relating to the UK's departure from the bloc is . Some have even suggested that Pound Sterling is close to becoming a bargain at current levels. 

The question for traders now is, as we approach the Brexit end-game and the odds of a last-minute compromise from Prime Minister Theresa May and her government increase, is it now time to buy the Pound? Or can others look forward to better Pound-to-Euro exchange rates?

Buying the Pound may seem like an insane proposition to some but many analysts have said the odds of a "no deal Brexit" are actually very low as the PM is likely to offer any compromises that she has to in order to avoid such an outcome. If this is right, the Pound could be edging toward a sharp move higher. 

"Brexiteers probably also will be content to settle for getting Brexit "over the line", given the still-significant risk that it might not happen at all, either following a change of government or a second referendum. Indeed, Mrs. May's ability to threaten rebellious Brexiteers within her party with a second referendum has been enhanced following a rise in public support for another vote. Accordingly, we see just a 10% chance of a no-deal Brexit," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

The likely-extreme negative consequences of not securing a deal with the EU has led most economists to view it as a highly unlikely event. A 'no-deal' Brexit could see the opposition win a vote of no confidence against the government, backed by Remain-supporting Conservative MPs, leading to another election.

However, not all analysts are as certain the Pound is ready to start motoring higher from present levels. Some still expect further losses for the British currency during the weeks ahead.

"We expect the GBP to underperform other major European currencies over the coming 3-6M given rising “cliff edge Brexit” risks", says Stephen Gallo, European head of FX strategy at BMO Capital Markets. "Accidental “cliff edge Brexit” risks are increasing because a number of the EU’s so-called “red lines” in the negotiations are driving a wedge between MPs and factions within the ruling Conservative Party."

Gallo and the BMO team forecast the Pound-to-Euro rate at 1.0825 in six months time as a consequence of unease over the likely outcome of the Brexit negotiations.

Meanwhile, some of those who say "a lot of bad news is already priced into Sterling" project the Pound-to-Euro rate will find strong support at 1.0950 and suggest that deteriorating risk-reward metrics will prevent traders from pushing below here.

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