Pound Slides Below $1.20 After Boris Johnson Threatens Snap Election
The pound rebounded after sliding to the lowest since 2016 in volatile trading as the prospect of a general election added an extra layer of complexity to the Brexit calculus.
Sterling headed for its first gain in five days against the dollar after the defection of a Conservative party lawmaker removed a parliamentary majority for Prime Minister Boris Johnson, likely making it more difficult for him to win backing for a no-deal Brexit.
Sterling has fallen nearly 20% since the referendum vote to leave the bloc in June 2016, with the currency a market barometer for political developments. Johnson said he would trigger a general election on Oct. 14 if lawmakers vote later Tuesday to force him to delay the Brexit departure date again beyond end-October.
“Johnson losing his majority will be seen by the market as reducing the chances of a hard Brexit,” said Neil Jones, head of hedge-fund currency sales at Mizuho Bank. “Any political development that drives us away from a no-deal Brexit is good for the pound right now.”
The pound rose 0.2% to $1.2088, after earlier dropping as much as 0.9% to hit $1.1959, the lowest since October 2016. U.K. government bonds held a rally after 10-year yields fell to a fresh record. A no-deal Brexit may see yields slide to zero or even lower, according to Citigroup Inc.
Overnight volatility on the pound has spiked up to the highest since April ahead of Tuesday’s parliamentary vote, with a gauge of three-month price swings also climbing as the Brexit deadline nears. Speculation over an election before then has been rising as that could enable Johnson to change the parliamentary arithmetic to get his plans through.
“Recent polls are suggesting that the pro-Brexit Tory party, Brexit Party and the DUP could come close to winning a majority and thus be able to deliver Brexit with or without a deal,” said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA.
The currency may drop to as low as $1.10 if an election is seen delivering a mandate for a no-deal departure from the EU, according to Lee Hardman, a strategist at MUFG. A Bloomberg survey of strategists carried out last month saw an election as a better scenario for markets than a no-deal Brexit, with a vote seen pushing the currency down to $1.19 versus $1.10 on a crash exit.
Johnson’s combative approach with parliament has also seen him ask the Queen to stop lawmakers from meeting for a month, and warn potential Tory rebels that they would be expelled if they voted against him over a Brexit delay. Yet he would still need two-thirds of MPs to vote for an election -- or 434 lawmakers. He has only 310, after MP Phillip Lee defected to the anti-Brexit Liberal Democrats.
The pound looks likely to remain under pressure for Morgan Stanley, with room for a fall to $1.15, strategists including Hans Redeker said in a research note. The bank now expects an election to be called either in October before the Brexit deadline or sometime in the fourth quarter, according to a separate note from its economists.
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