Pound Fate Seen Going From Bad to Worse as Brexit Saga Plays Out
(Bloomberg) -- The pound’s fate may be set to worsen after its longest run of losses versus the euro since the shared currency’s inception.
Sterling investors have to contend with European parliamentary elections next week that are expected to be won by the no-deal Brexit-backing party run by Nigel Farage. That would increase the chances that whoever replaces Theresa May as Prime Minister in a leadership contest might push for a sudden exit from the European Union, according to Societe Generale SA.
“What the EU election next week will make clear is that the next leader will be a hard Brexiteer,” said Kenneth Broux, a currency strategist at Societe Generale SA. “Of all the candidates so far Boris Johnson is the most ardent Brexiteer and most bearish for the pound. The pound could soon be back at $1.20.”
The pound slid to a four-month low near $1.27 on Friday after May committed to a timeline for leaving office from June and as the opposition Labour Party pulled out of Brexit talks with the government. That means it is unlikely the Brexit deal will get lawmaker approval at its fourth attempt in the week of June 3.
Those risks have seen the pound fall against the euro for a record 10 days straight, even though the common currency is also being weighed down by the prospect of populist gains in the elections. The EU poll will take place on Thursday with the results coming on Sunday evening. The vote will be more in focus for its ramifications in the U.K. rather than the actual results, with British candidates unlikely to serve more than a few months if Britain does leave the bloc in October.
The flare-up in Brexit uncertainty has caused U.K. government bonds to rally, with yields nearly touching 1% on Friday, their lowest level since the beginning of April. Royal Bank of Canada is recommending tactical long positions in both gilts and German bunds for safety.
“We think the gilt market is likely to perform well if Brexit uncertainties become more prominent again and add to the market’s anxiety as well,” said strategists including Peter Schaffrik. “We believe we might well see the 1% level in 10-year gilts to be reached over the next coming weeks.”
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