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Hard Brexit or snap UK election could further weaken pound

Publication Date: 01 Jul 2019 - By ReachX Team By ReachX Team
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FX & Rates FX EU ex-UK UK

More uncertainty around Brexit in the event of a new UK Prime Minister will cause the pound to further depreciate in the coming months, according to a leading FX expert.

In a recent note to clients, Richard Falkenhäll, senior FX strategist at Nordic bank SEB, said there seem to hardly any positive factors for the British currency with Boris Johnson and Jeremy Hunt toughing it out to replace Theresa May. 

“The UK economy is likely to slow and activity relies more and more on the household sector. Although the labour market remains tight, the situation on Brexit is still very uncertain, and the Bank of England is unlikely to change the outlook for policy, which suggests that policy will remain unchanged in further meetings this year and for most of 2020.”

Falkenhäll added that the pound is undervalued because of the Brexit risk premium and it gives some room for it to strengthen if the Brexit debacle is resolved. “The risk premium in the GBP related to a hard Brexit is still significant. This makes the GBP long-term undervalued against several currencies. Our long-term fair value model suggests that the pound currently trades with a discount of around 15% against the EUR and the USD.”

The SEB strategist noted the outcome looks more uncertain at present and this suggests that the GBP should fall further in coming months. 

“However, should Brexit end up with Parliament accepting the withdrawal deal or in a second referendum, this will trigger a significant recovery of the sterling. Should it end up with a hard Brexit or a snap election, the GBP would instead become even weaker.”

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

ReachX Team

 

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