Pound Sterling Plunge Extends into Tuesday: Sterling Down Extra 0.5% vs. Euro and Dollar
Above: Prime Minister Boris Johnson touring Scotland on Monday. Image courtesy of Number 10 press office.
The British Pound sell-off extended into the Tuesday foreign exchange trading session in Asia as traders continued to discount a 'no deal' Brexit into the currency's valuation.
The Pound-to-Euro exchange rate is quoted at 1.0893 at the time of writing, the all-time low is around 1.0757.
The Pound-to-Dollar exchange rate is quoted at 1.2133, the all-time low is 1.0677 which was hit in 1985.
“Tin hats time: All the stops are out and the pound is now in free fall," says Neil Wilson, Market Analyst for Markets.com. "There is now a very real chance that the pound will fall to $1.20 and even below. Remember the previous post-2016 low was before no-deal was on the table – it was all talk of a hard v soft Brexit – no deal wasn’t even being discussed.”
The declines in Sterling comes amidst a series of statements from Prime Minister Johnson and senior government officials that have all but suggested the gap between the EU and UK on Brexit will simply be too great to bridge and the UK will therefore exit the EU on World Trade Organization Rules on October 31.
Johnson pledged to "hold out the hand" and "go the extra thousand miles" to strike a new Brexit deal when on a visit to Scotland on Monday.
However, Johnson reiterated the existing withdrawal agreement negotiated with European leaders was "dead" and had "got to go", comments that contributed to Sterling suffering its single-largest decline since March.
Above: GBP/EUR has yet to find a floor.
Johnson told reporters:
"I don't want the UK to be aloof or hanging back, I want us to engage, to hold out the hand, to go the extra thousand miles, and what we want to do is make it absolutely clear that the backstop is no good, it's dead, it's got to go.
"The withdrawal agreement is dead, it's got to go. But there is scope for us to do a new deal.
"We will make it very clear to our friends - we're talking to the Irish today - what the limits are and what we want to do.
"We're very confident that with goodwill on both sides, two mature political entities, the UK and EU, can get this thing done."
Markets entered the new week with assumptions that a 'no deal' Brexit stood at about 30%, which was quickly exposed as being too low given a slew of weekend headlines suggesting the government was itself now assuming a 'no deal' Brexit would take place in October.
Over the course of Monday markets have steadily raised their 'no deal' assumptions, and Sterling has felt the heat as a result and further losses are expected.
"We see more GBP weakness to come. The current sterling meltdown is in line with our view that GBP risks are heavily skewed to the downside given the Brexit uncertainty and rising odds of an early election (our base case)," says Petr Krpata, a foreign exchange analyst with ING Bank N.V.
ING are forecasting the GBP/EUR exchange rate to head towards the 1.05 level with GBP/USD falling to 1.18.
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The Government's official stance is that the existing Brexit deal has to be scrapped, the EU have stated repeatedly the deal struck between Johnson's predecessor Theresa May and the EU is non-negotiable.
"While we are optimistic about the future, we are realistic about the need to plan for every eventuality. The EU’s leaders have, so far, said they will not change their approach — it’s the unreformed withdrawal agreement, take it or leave it," Gove wrote in the Sunday Times. "We still hope they will change their minds, but we must operate on the assumption that they will not."
Gove's comments are cited by Adam Cole, a foreign exchange strategist at RBC Capital Markets, as one reason for Sterling's underperformance on Monday:
"Cabinet minister Gove’s comments over the weekend that the government is operating on the assumption of no deal seem far removed from PM Johnson’s “million to one” characterisation during his campaign."
Gove will chair meetings of civil servants and political advisers every day until Brexit is delivered.
Sajid Javid - the new Chancellor - is meanwhile readying to announce an urgent spending platform to prepare for Brexit on October 31.
Javid told the Sunday Telegraph he will overhaul of the Treasury’s approach to Brexit, beginning with “significant extra funding” this week to get Britain “fully ready to leave” on time, with or without a deal.
The additional spending will include financing one of the country’s “biggest ever public information campaigns” to ensure individuals and businesses are ready for a 'no deal'.
He states that “all necessary funding will be made available” to ensure the UK is ready to leave the EU on October 31.
"Keep calm & stay bearish," says Emmanuel Ng, an analyst with OCBC in Singapore. "With PM Johnson peddling the hard line on the Brexit negotiations, and the Bank of England also turning its back on rate hikes, there might be little in the way of an upside for the GBP for now."
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