FX: Sterling (GBP) Traders Focused on BREXIT Outcome
- GBP/USD: -0.32% to 1.2721, Tuesday’s action is the 9th consecutive decliner for the GBP
Having sunk to 13-month lows, the Pound Sterling could fall by up to another 10% in the coming months should Britain crash out of the EU without a deal on future trade ties, luring more speculators to bet against the fragile currency.
GBP lost almost 2% last week.
The latest move lower was kicked up by trade minister Liam Fox’s warning that, with Britain less than 8 months from its scheduled EU departure date in March, there was a 60% chance of leaving without a deal.
The moves were certainly exacerbated by a big USD rally, and GBP has since clawed back the worst of its losses Vs EUR, rebounding from 10-month lows .
But the worry, say analysts, is that in the absence of any conclusive developments towards a deal over the coming months, GBP’s dive will accelerate while the clock ticks down on the deadline and hedge funds are tempted into betting against the currency.
And clouding the vision are major political events
PM Theresa May’s Conservative Party conference in early October, and meetings of EU leaders in late September and then mid-October.
“There’s no guaranteed date for when Brexit progress or hard Brexit will be known by apart from exit day on 29 March 2019,” Nomura analysts told clients, describing a “hard BREXIT” as a “cliff edge” moment in which Britain crashes out of the EU in March 2019 without any future trading arrangements in place.
“We find that we are very much in the early stages of pricing for a hard BREXIT.”
How will Sterling trade in the later stages, then?
Most economists still believe Britain will reach a deal with the EU. But the latest Reuters polls indicate risk of no deal have risen to 25%, Vs 20% in July.
Some bookmakers price even higher odds, above 40%.
If that does not happen , Britain’s currency would crash to 1.20 – from Tuesday’s 1.2750 mark, the Reuters poll showed, a fall of around 6%. But GBP is forecast to rise to 1.34 by end-January if an agreement is reached.
Reflecting the uncertainly the price investors are prepared to pay for the future right to sell sterling has rocketed.
3-month GBP/USD risk reversals, a gauge of Put-to-Pall options, have plunged to their weakest level since January 2017, indicating heightened demand for ‘puts’ — derivatives that give holders the right to sell an asset.
‘Call’ options give the right to buy.
As BREXIT approaches, more wild price swings are likely.
Shorting sterling remains a risky play.
Should Britain retain close trading ties with the EU, GBPcould jump towards its post-BREXIT referendum high of 1.4377 reached in April. A BREXITon these terms would also clear the path for the Bank of England to tighten monetary policy further.
So, since it is likely there will be a EU trade deal and an enhanced US trade agreement, The Great British Pound looks cheap t me.