If bookmakers and sentiment surveys of Conservative Party members are to be believed, Boris Johnson is nailed on to replace Theresa May as the Prime Minister of the UK, and the front-runner’s hardening stance on Brexit is leading to a re-pricing of the pound sterling, according to a leading city analyst.
In a recent client note, Kit Juckes, Head of FX at Société Générale, said the hardening of Boris Johnson's language on the thorny issue of the Irish backstop and ruling out a time limit or a unilateral exit clause mark “a dramatic turn” that makes a no-deal Brexit more likely.
“As a consequence, the forex market continues to re-price the pound away from the ‘no no-deal' view which prevailed as recently as the start of May, to a ‘no-deal is likely' view.”
Juckes’ team at SocGen thinks that a ‘soft' Brexit would take EUR/GBP to a level around 0.82-0.88, while a ‘no-deal' exit would see a move to 0.91-0.97.
“Absent inflation, there are limits to how weak sterling can get and EUR/GBP parity is probably too far, in part because a no-deal exit would be negative for the euro too. A simple rule of thumb might be that for a 1% move in EUR/GBP, we could expect a 0.3-0.5% move for EUR/USD. In other words, if EUR/GBP were to rise 5% to 0.95, EUR/USD would probably trade below 1.10, other things being equal. And GBP/USD could trade down to 1.16 in the process.”
These days, the pound sterling is only a buy if you're sure Parliament can prevent a no-deal Brexit, Juckes concluded.
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