With the chance of a 2019 Brexit now reduced to 50 percent, the pound’s value is likely to remain capped for the time being, most likely near US$1.34, experts say. On the downside, US$1.24 is likely should the latest Article 50 extension be used to hold a UK general election.
The UK was spared a “cliff-edge” Brexit last week after the EU granted an Article 50 extension until the end of October. That, though, made little difference to bookmakers, which continue to price a Brexit in 2019 at “evens,” implying a 50 percent chance of this happening.
Like bookmakers, the British pound ignored the latest development in this long-running political saga, at least against the US dollar. Sterling did little on all five trading days of last week, with open-to-close daily ranges never exceeding a third of a cent, or 0.25 percent. Sterling ended the week buying US$1.306, in line with the 3-month average rate, although it did lose some value against the euro, which now trades at €1.157 per GBP.
Politically speaking, several things could happen now. There is ample time for a Conservative Party leadership contest, but a second referendum on EU membership or general election would need to be squeezed through if no further extensions are to be sought.
For the UK’s current prime minister Theresa May, it’s highly unlikely that she survives the summer—the 1/7 odds offered by Bet365 imply an 88 percent probability of her departure in 2019.
What about a second referendum? At 9/4 for 2019, the Betfair market is assigning that a 30 percent probability.
On a general election, bookmakers are split, with implied probabilities ranging from 36 to 52 percent.
It’s quite clear, then, that sterling remains in limbo and is therefore likely to remain capped over the coming half-year.
“[The] delay serves only to kick the can down the road,” says Rabobank analyst Jane Foley. “The UK has now been saddled with a prolonged period of uncertainty which is likely to exacerbate the pressure on the economy and in particular the profitability of exporters.”
For MUFG, it’s a “lack of immediate clarity” that means that sterling is “unlikely to break above US$1.34” anytime soon, although the Japanese bank has said that the removal of no-deal risk “will support the pound around the US$1.30 level.”
There’ll be anything but currency support should an election be called, thinks UBS strategist Tan Teck Leng. Speaking on CNBC’s Street Signs show, Tan said that the “heightened uncertainty” stemming from elections could result in traders selling the pound down to US$1.24. Recent polls have indicated a major change in British politics if an election takes place, with Labour the likely victors for the first time since 2010.