HSBC Says British Pound May Soar. Or Crash

(Bloomberg) --

The outcome of Britain’s December election poses a binary choice for the nation’s currency and “anything can happen” at the polling stations, according to the largest U.K. bank.

A result paving the way to a Brexit deal with the European Union could send the pound up about 12% to $1.45 by the end of next year, David Bloom, global head of foreign-exchange strategy at HSBC Holdings Plc, said in an interview with Bloomberg Television from Doha. Or a no-deal Brexit could see it tumble some 15% to $1.10.

“Nothing is priced in,” Bloom said. “The political outcome will determine the future of the currency.”

His comments contrast with traders’ confidence in sterling, fueled by polls suggesting the Conservatives will defeat Jeremy Corbyn’s Labour Party on Dec. 12 and secure a Brexit deal that could help end the U.K.’s political paralysis. The pound is hovering near a six-month high against the euro, while traders are confident that Prime Minister Boris Johnson will maintain his lead, a gauge of expected large moves in the currency suggests.

“It looks like a Conservative majority but it’s not that simple. It’s quite a complicated set of circumstances and it’s still completely open -- anything can happen,” Bloom said.

Sterling steadied at $1.2952 on Tuesday, and held steady against the euro at 85.45 pence. The yield on U.K. 10-year government bonds was little changed at 0.75%. The pound has led gains in the Group-of-10 currencies so far this quarter, rising 3.8% against the euro and 5.4% against the dollar.

Any resolution is good, Bloom said, either it be another referendum or a Brexit deal. Political wrangling will start to ebb away, the economy could get a fiscal boost and the Bank of England could start considering rate increases. The reverse could see recession fears flare.

Most strategists see a Conservative majority as the best outcome, as it would enable Johnson to push through his deal in time for the Jan. 31 deadline and move forward with negotiating a new trade deal with the European Union. They see an outright win for Labour as damaging the pound, as Corbyn could ramp up public spending, nationalize utilities and increase taxes for the rich, raising the risk of capital flight.

Among three election scenarios, a hung parliament -- where neither the Conservatives nor Labour get a majority -- would be the worst for the currency, Bloom said.

In that case, there would be no majority of lawmakers in favor of a fresh referendum on Brexit, nor favoring any specific Brexit deal. “We could be back in the mud” and “lost in the wilderness.”

To contact the reporters on this story: Tracy Alloway in Abu Dhabi at talloway@bloomberg.net;Christopher Anstey in Tokyo at canstey@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Dana El Baltaji, William Shaw

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