30 July 2019

The Economist: The pound is tumbling on fears of a no-deal Brexit

Since Boris Johnson moved into Downing Street, sterling has lost about 2% of its value on a trade-weighted basis. It is now at a two-year low against the dollar. Expect further declines as exit day approaches.

In truth, the twists and turns of the Brexit saga are not the only reason for sterling’s downward slide over the past few months. In April and May traders began to panic about the effect of a trade war between America and China on global economic growth. [...]

In June worries about the trade war eased—only to be replaced by a fresh concern, the health of Britain’s economy. That month the statistics office alarmed analysts by revealing that GDP had fallen in April by 0.4%. Other survey data suggest that Britain registered no economic growth in the second quarter of the year. [...]

The apparently growing risk of no-deal, however, is driving the most recent bout of depreciation. [...]

the most likely exchange rate against the dollar in the event of a no-deal is $1.06—which would be the lowest value ever recorded.

 

Yet even that estimate might be too optimistic. In the past fortnight, the correlation has changed: sterling has tumbled even faster as the probability of no-deal has risen on Betfair. That might be because Mr Johnson, who is refusing to meet European leaders unless they agree to scrap the Irish backstop, is risking a particularly acrimonious version of Brexit. If sterling were to keep following this steeper downward trajectory, then the most likely exchange rate in the event of no-deal would be $1.00.

Full analysis on The Economist

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