Pound Pundits Believe the U.K. Is Unlikely to Exit EU by March

(Bloomberg) -- Currency strategists are starting to doubt that the U.K. will exit the European Union by the end-March deadline.

The market is focusing on a potential extension to Article 50 and an eventual deal or second referendum, rather than a no-deal scenario that would see the pound crash, strategists say. Still, that leaves little conviction for the pound to rally in the short term given the political uncertainty. Article 50 of the EU’s Lisbon Treaty offers member states guidance on how to start the process of leaving the bloc.

Pound Pundits Believe the U.K. Is Unlikely to Exit EU by March

Options bets are still in favor of selling the pound as the government steps up preparations in case Britain crashes out of the bloc without a deal in March. Prime Minister Theresa May is opposed to a second referendum and is pushing back against calls for Parliament to get votes on the different options.

Here’s what analysts see happening next:

Commerzbank AG (Pound in limbo)

  • “Our base case is actually that the government will ask for an extension of Article 50 to get more time to negotiate a new deal that has a chance of passing in Parliament,” according to currency strategist Thu Lan Nguyen.
  • The reduction in volatility over the two to three month horizon suggests “the market sees increasingly a chance of a postponement of important decisions, which would be in line with our base case.”
  • The pound will “remain in limbo” until the Brexit outcome is clear.

Mizuho Bank Ltd (Sees Article 50 delay)

  • “The most likely scenario is that Article 50 is delayed and buys the Prime Minister time,” according to bank’s head of hedge fund currency sales Neil Jones.
  • This would see “an initial rally for the pound but it will not last as it elevates uncertainty.”

MUFG (No deal avoided)

  • The bank “expects a no deal to be avoided,” according to analyst Lee Hardman.
  • See three different scenarios to achieve this -- either an amended version of May’s deal is passed at some point, a softer Norway plus type deal is passed with cross party support or a second referendum is called resulting in a vote to Remain or to adopt an amended version of the Prime Minister’s deal.
    • “In all scenarios we believe a request from the U.K. to extend Article 50 appears increasingly likely.”
  • The pound would likely strengthen in all scenarios, with the best case scenario for sterling “a vote to remain.”

Societe Generale SA (Sell rallies until deal)

  • “We still think a deal of some sort will get through Parliament but I don’t think we should entirely rule out Article 50 being extended,” says strategist Kenneth Broux.
  • “A Parliament ‘no’ vote is priced in to some extent but I am still of the view that pound rallies are a sell until we finally have that vote in the new year.”
  • Broux sees a negative bias on the pound until the outcome is clearer, with intermittent short covering rallies thanks to ‘scenario gaming’.
  • The strategist puts the probability of a deal at 75 percent, no deal at 20 percent and sees a 5 percent chance of a second referendum.

BBVA (Expects relief rally)

  • The bank still sees the U.K. Parliament voting through a Brexit deal that contains a compromise on the Irish backstop, according to currency strategist Alexandre Dolci.
  • “In that case, the pound should benefit from a relief rally as some uncertainties are cleared off the table, confidence is somewhat restored and pound shorts are covered.”
  • The market seems to have very little conviction in any outcome.

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