Pound Could Slide to $1.10 on No-Deal Brexit ScenarioBy
Estimates of likelihood of no deal range from 5 to 40 percent
Market looking for progress in EU divorce talks by December
The risk of a no-deal Brexit is playing on investors’ minds.
The European Union is likely to confirm this week that Brexit talks have not made sufficient progress to move onto discussions about a future trading relationship, though the U.K. will be hoping it will consider a two-year transition period. The pound rallied above $1.33 on that prospect last week, before a spokesman for German Chancellor Angela Merkel shot down the idea.
Markets are now eyeing December as the next important deadline to make progress in the divorce talks, with just over a year to go at that point until Britain leaves the bloc. While most currency strategists surveyed by Bloomberg News see some kind of agreement or transition as a base case scenario, the chance of not getting a deal is a significant risk.
Here’s a roundup of views on the likelihood of no deal and the potential sterling reaction:
- How much Britain has to pay the EU is the most important factor in determining the success of the talks, says global head of currency strategy Hans Redeker
- “Should we get an acceptable divorce we will get a Brexit deal”
- That means risks are “front-loaded”
- Sees a 15 percent probability of no-deal resulting in “new lows in cable” with the currency falling as low as $1.11
Mizuho Bank Ltd.
- Currently “reasonably high probability” of no deal although this will likely reduce as we get closer to the exit date, says head of hedge fund sales Neil Jones
- Assigns 35-40 percent chance of U.K. leaving without a deal
- It’s “unlikely the parties will agree on an amount” for the U.K. to pay making it “tough to envisage” currently
- If there’s no Brexit deal, sterling would fall to $1.10
Canadian Imperial Bank of Commerce
- Britain leaving the EU without a deal is “still a low probability scenario, perhaps around 20 percent,” says head of Group-of-10 currency strategy Jeremy Stretch
- If no progress is announced at the EU’s December summit, “that probability would soar, perhaps making it a fifty-fifty”
- This would see the pound falling “sharply lower,” to below $1.25 and toward 94 pence per euro
Nomura International Plc
- “Whilst the next election may be 2022, any party in power knows that they will never be forgiven by voters, even if two to three years afterward, for not securing a transitional deal at the least,” says currency strategist Jordan Rochester
- Estimates the likelihood of Britain tumbling out of the EU with WTO rules at 20 percent
- If no deal, sees pound falling to $1.10-$1.20
- The bank sees a 30 percent probability of no deal, “substantial but not our central view,” says head of currency strategy Jane Foley
- “If a ‘no deal’ scenario appeared, GBP would likely become even more vulnerable”
- Central view is $1.32 in three months, while a greater chance of a hard Brexit would shift this to $1.30
ING Groep NV
- No deal is currently “a tail risk” of around 5 percent, according to currency strategist Viraj Patel
- That risk is “already in the price” for sterling, but in a scenario where the odds rise to 25 percent, sterling would hit historic lows, dropping to as low as $1.20 and with EUR/GBP above 95 pence per euro
- “To be honest the breakdown in talks could happen at any time but in reality the risks are for a defining moment for the pound in the first quarter of 2018”
- “If we’re at a stage where there’s no transition, no progress, markets will shift quite quickly to a ‘no deal’ scenario”
- “The fallout for the currency is certainly catastrophic under a no deal scenario”