Pound sterling's no-deal Brexit ache remains alive and kicking

The results of the 2019 European Elections will ensure that a no-deal Brexit risk for the pound sterling remains in the medium-term forex mix, according to a leading City analyst. 

In a note to clients, Kit Juckes, Head of Forex at Société Générale, recalled the effects of the last election on the British political climate. “In the UK, the rise of UKIP prompted the (Conservative) government to offer voters a referendum on EU membership. The rise of the Brexit Party seems to be hardening the view that the Conservative Party can't afford to fail to deliver an exit from the EU.”

Juckes said the standoff between those who want to leave without a deal if necessary and those who would rather stay than leave without a deal, will remain in place but the pound could be a fair bit weaker by the time either side is forced into a rethink. 

The BTP/Bund spread is a little wider again on Tuesday (28 May) morning, back at levels last seen in December. “EUR/USD seems capped above 1.13, and the latest round of short-covering has run out of steam. It's unlikely to move quickly, but another marginal new low for this move is quite likely in June. There's upside to EUR/GBP towards 0.90, and downside in GBP/USD to 1.25 as a result,” Juckes added. 

Looking beyond the UK, the SocGen expert noted the success of Green and Liberal parties will shift the focus of the ruling coalition in Europe, and the starting-bell has rung out for negotiations over key EU jobs, but the relative failure of populist parties will, if it does anything at all, marginally reduce fears of the system imploding. 

“More important, at individual country level, are the possibility of Italian elections, and the reaction of the main contenders for the leadership of the Conservative Party in the UK.”