Pound pressured as hard Brexiters emboldened in race to succeed May


Sterling trades near 4-month lows after 3 weeks of losses

PM candidate Boris Johnson says prepared for no-deal Brexit

Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

LONDON, March 28 (Reuters) - Sterling languished just off four-month lows on Tuesday, with risks of a no-deal Brexit seen rising as the battle to succeed Prime Minister Theresa May got underway.

The prospect of a no-deal Brexit, which most economists say would severely damage the British economy, has re-emerged as a key risk for sterling after May said last week she would step down as leader of the Conservative Party on June 7.

With the Brexit Party handing the ruling Conservatives a drubbing in last week's European elections, many Conservative candidates vying for May's job are under pressure to deliver a more decisive break with the EU when Britain is scheduled to leave the bloc on Oct. 31.

While foreign minister Jeremy Hunt said no-deal Brexit would amount to "political suicide", other candidates including front-runner Boris Johnson have signalled they are prepared for that if Brussels does not reopen negotiations over May's unpopular withdrawal agreement.

Sterling slipped 0.13% to $1.2657, having traded as low as $1.2605 last week GBP=D3. It was down 0.2% versus the euro at 88.405 pence to stand just off four-month lows EURGBP=D3.

"For the Brexit Party to get so many votes is a sign to politicians that people are not as afraid of the no-deal scenario as most members of parliament. So the no-deal risk has increased a bit," said Morten Lund, FX strategist at Nordea.

But no-deal Brexit probabilities remain around 15-20%, according to Lund, who expects lawmakers to call a no-confidence vote against any prime minister who chooses that route.

"It's more or less priced in that Boris Johnson will become prime minister so with the pricing now I don't see that much downside. I see sterling trading around these levels but with a downward bias," he said.

The pound has fallen for three consecutive weeks versus the dollar and euro. It has fallen 3% in May as May failed in her effort to find a Brexit compromise with the opposition Labour Party.

Options markets are indicating increasing jitters about the Oct. 31 deadline, with implied volatility contracts expiring after that date trading at a significant premium to those expiring earlier.

The premium for sterling puts -- the right to sell at a certain price -- has also risen compared to calls which confer the right to buy.

(Reporting by Tommy Wilkes and Sujata Rao; editing by Jason Neely)


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.