The pound drifted lower on Tuesday ahead of the unveiling of the next British prime minister, with the expected elevation of Eurosceptic Boris Johnson set to usher in a new period of Brexit uncertainty.
Sterling fell 0.4 per cent to trade around $1.245, although it was above the 17-month lows it plumbed last week when Mr Johnson and his rival for the Conservative leadership Jeremy Hunt both hardened their stance on renegotiating outgoing prime minister Theresa May’s exit deal with the EU.
The pound has fallen more than 2 per cent this month as investors have repriced the chances of a no-deal Brexit under Mr Johnson, and is down 2.6 per cent for the year to date.
If elected leader, Mr Johnson is expected to set out his vision for the country on Friday, and to tour European capitals to discuss his hopes for a new Brexit deal soon after. He took a particularly hard stance on Brexit in the leadership campaign, and has promised to leave the EU at the end-of-October deadline “come what may”.
Sterling traders are bracing for swings, and have piled into contracts which pay out if the currency fluctuates in the run-up to the October 31 Brexit deadline. “Sterling volatility spiked significantly last week amid renewed political chaos in the UK and the resulting concerns around a hard Brexit,” analysts at Bank of America said.
Investors’ expectations for swings over the next three months have risen further this week, although they remain below the levels seen during Mrs May’s failures to force her Brexit deal through parliament.
Analysts and investors will be watching closely to see if Mr Johnson’s rhetoric moderates once in Downing Street.
“Mr. Johnson may take a more conciliatory approach in office,” said Mark Haefele, chief investment officer at UBS Wealth Management.
UBS said it estimates the market is now pricing in a 50 per cent chance of a no-deal Brexit, which faces several barriers including parliamentary opposition. “The market may now be overstating the short-term risks of a no-deal departure,” Mr Haefele said.
Still, currency strategists at Dutch bank ING said the expected resignations of ministers who disagree with Mr Johnson’s Brexit stance, including Chancellor Philip Hammond, could put additional pressure on the pound.
“The appointment of new senior cabinet figures should occur tomorrow evening, with more pro-Brexit candidates being appointed. This suggests an overall downside bias to sterling in coming days,” the bank said.
