LONDON, Aug 7 — Sterling was stuck today around its weakest levels since 2017, having matched a two-year low against the euro, as investors further priced in the probability of Britain leaving the European Union without a deal in place.
Boris Johnson, who took over as prime minister two weeks ago, has said he would take Britain out of the EU on October 31, with or without a divorce agreement to smooth ties with the bloc.
He said he is looking to negotiate a deal with the EU, but he also demanded that Brussels show a willingness to change the deal it agreed with his predecessor before negotiations. The EU has repeatedly said it will not reopen the negotiations.
Johnson’s insistence that Britain is boosting preparations to leave without a divorce agreement has spooked markets, and last week it sent the pound tumbling.
With the clock ticking, there may be no time left to prevent a no-deal exit, which could tangle up trade routes.
Today, Britain’s food and drink lobby warned that Britain would experience shortages of some fresh foods for weeks or even months if a disorderly no-deal Brexit left perishable produce rotting in lorries at ports.
Most investors have been forced to recalculate their assumptions of a no-deal Brexit. Odds on betting websites currently suggest that the probability of Britain leaving the EU this year without a deal is roughly 60 per cent.
“There is so little time left between the start of the next parliamentary term and October 31 that the PM needs only to run down the clock to allow the UK’s legal default position of a ‘no-deal’ Brexit to take place,” said Jane Foley, a senior currency strategist at Rabobank.
The pound was slightly lower at US$1.2162 (RM5.11) today, not far from the 31-month low of US$1.2080 it reached at the beginning of the month.
Against the euro, the pound was down by 0.3 per cent at 92.34 pence, having fallen earlier to 92.49 as it matched the August 2017 low it reached yesterday. Rabobank’s Foley estimates that a no-deal Brexit uncertainty is likely to push euro/sterling towards parity.
“It is highly likely that euro/sterling will continue to move higher,” she said.
The derivatives market implies that traders foresee further sterling weakness.
Three-month sterling risk reversals, which cover the October deadline, show that investors have been buying more options betting the pound would fall than options betting it would rise.
According to the Commodity Futures Trading Commission data, leveraged funds added more net short sterling positions in the week to July 30, taking the amount of contracts to US$6.85 billion, its highest since May 2017.
However, some market watchers are more optimistic, sticking to the view that the worst is left behind.
“The pound has taken the most of the Brexit pain. Its stress index is at its highs,” said Jordan Rochester, forex strategist at Nomura.
Andreas Koenig, head of global forex at asset manager Amundi, said he was underweight sterling, but only slightly because the many possible Brexit scenarios leave the door open for sterling moving in either direction. — Reuters
Source: The Malay Mail Online