Boris Johnson is, once again, weighing on sterling.
“Boris Johnson’s pledge to leave the EU in October — deal or no deal — is a problem,” said Jordan Rochester, a currencies analyst at Nomura. “Any increase in ‘hard Brexit’ pricing as the October deadline approaches will likely drive sterling lower,” he added.
Sterling has lost nearly 5 per cent of its value against the dollar since the start of May — a sharp contrast to other major currencies like the euro that have held firm against the dollar on strong expectations that the US will cut interest rates. Now, one pound buys $1.2590, close to the lowest point of this year. It has also sunk by a similar degree against the euro to €1.12.
That decline has come while a Bank of America Merrill Lynch survey has found that 62 per cent of fund managers believe the chance of the UK dropping out of the EU without a deal is increasing, even though such an outcome lacks support from members of parliament.
The result of the race to lead the Conservative party will not be announced until July 27, but in the run-up, banks have been amplifying their warnings to clients. Nomura now believes there is a 30 per cent chance of such an outcome, up from 15 per cent previously.
Jim Reid, a strategist at Deutsche Bank, said the Brexit saga still has a long way to run but “we are currently in the eye of the storm” as for him, the probability of the UK agreeing a deal by the October 31 deadline and that of a no-deal exit are now equal at 25 per cent.
Now, the perceived support from the central bank is fading, after the UK’s economic performance in the second quarter of the year weakened while the run of disappointing data such as downbeat car manufacturing numbers added to the list of negatives for the pound.
JPMorgan strategists say sterling could fall as much as 20 per cent in the aftermath of a no-deal exit and there is a risk of the pound “completely slipping its anchor in the face of overwhelming, one-sided capital flows”.