Pound May Re-Live June 2016 Nightmare If No Brexit Deal Clinched

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Tumbling out of the European Union without a deal in hand could cost the pound dearly.

Sterling could slump as much as 8 percent against the dollar if the U.K. doesn’t clinch a deal with the EU by March 29, when the nation is slated to leave the bloc, according to a survey of analysts. That would mirror the 8.1 percent drop the pound saw on June 24, 2016, the day after Britain voted to leave the union. A no-deal Brexit is still regarded as a somewhat low-probability outcome, with the poll assigning a 20 percent chance to it.

Pound May Re-Live June 2016 Nightmare If No Brexit Deal Clinched

The pound could fall to $1.15, according to Mizuho Bank and MUFG, the most bearish of seven forecasters who took part in the Bloomberg survey. The median was for a decline to $1.20, while the most optimistic outlook was for a loss in value to $1.25, which is almost 4 percent below the pound’s level of $1.2990 as of 12:30 p.m. Thursday in London.

More than two years after Britain voted itself out of the EU, the two sides are yet to reach an accord and the contentious issue is routinely plunging Prime Minister Theresa May’s government into crisis. Still, markets seem unruffled, with option volatility in the pound lingering near the past year’s average and the euro-sterling exchange rate stuck in a narrow range since late last year.

“The risk of Parliament rejecting any deal put in front of them late in 2018, or early in 2019, is increasing,” said John Wraith, head of U.K. macro rates strategy at UBS Group AG. “This puts both the agreement on future relationships and the transition period after the end of March 2019 in serious jeopardy. If the prospect of no deal gains momentum, there’s bound to be bigger moves ahead.”

With just days to go until Parliament breaks for its summer recess, it looks as though May will survive in her post until at least the autumn. Still, the pound slipped further Thursday as retail sales missed estimates, falling 0.6 percent against the dollar.

UBS sees the risk of Brexit without a deal increasing as May’s proposals stretch the fragile political alliances she has struck over the course of her leadership to breaking point. The prime minister told a lawmakers’ committee Wednesday that the government will be stepping up efforts to increase public awareness about preparations for a no-deal scenario.

The European Commission has responded by calling on the 27 member nations to step up contingency plans for Brexit talks collapsing without an agreement. Preparation must “be stepped up immediately at all levels and taking into account all possible outcomes,” it said in a document published Thursday.

RBC Europe sees “substantial repricings” in U.K. assets depending on how the political process goes, while BlueBay Asset Management said it was surprising that volatility wasn’t higher.

Below is a compilation of analysts’ views on the likelihood of the U.K. and EU failing to secure an agreement before the end of next March, and the potential market reaction:

How likely is a no-deal outcome?

  • The survey assigns a median probability of 20 percent to such a scenario, with Societe Generale SA’s Kenneth Broux pegging it between 40 percent and 50 percent
  • After May’s government narrowly defeated the amendment to keep the U.K. in the customs union if no deal is reached, “the perceived probability or fear of no deal will be higher in the short run and that uncertainty will be priced into the pound to a degree,” said Viraj Patel, a currency analyst at ING Groep NV

Where will the pound go?

  • Should Britain leave the EU without an accord, the pound would initially plummet and “hit new post-referendum lows,” said Neil Jones, Mizuho Bank’s head of hedge fund sales
    • He sees sterling falling to $1.15 but adds that “the sell-off will not last. The pound will recover and trend higher over time”
  • A no-deal scenario isn’t currently priced in by the market, so “I would anticipate at least a reaction to the extent we saw after the referendum,” said Thu Lan Nguyen, a currency strategist at Commerzbank AG
  • Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion Bank in London, said that the U.K. currency could slide on a no-deal outcome “with the market starting to move when negotiations begin to break down when there are only a few weeks to go”

©2018 Bloomberg L.P.