Markets Still Aren't Pricing in a Hard Brexit, ECB's Knot Says

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Brexit is currently the biggest political risk to markets, which aren’t yet pricing in a no-deal departure, European Central Bank Governing Council member Klaas Knot was cited as saying Sunday.

If Britain leaves the EU without a deal “there is a potential for significant repricing in the markets and pound sterling would come under pressure,” Knot, who is also governor of the Dutch central bank, said in an interview with Handelsblatt.

The pound dropped more than 1 percent last week to $1.3035, but it’s still the best performer among the Group-of-10 currencies this year.

The U.K. Parliament will take control of the timetable for Brexit options from the government on Monday after Prime Minister Theresa May’s withdrawal plan was resoundingly rejected for a third time on Friday. May’s government is now working on an alternative plan.

While Parliament’s role in the process has boosted the chance of a more favorable outcome, forecasts by some for the pound to rally toward $1.40 in three months may prove overconfident as current pricing seems to mainly factor in positive scenarios and overlooks potentially negative factors, Bloomberg FX and rates strategist Vassilis Karamanis wrote on Friday.

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