London: The best case for the pound after next week’s vote on Prime Minister Theresa May’s Brexit deal is also among the least likely. The worst case, a slump, is only slightly less probable.
That’s the finding of a Bloomberg survey of 11 banks before Parliament’s verdict on Tuesday on the plan for a March 29 departure from the European Union. Depending on the vote and May’s response to it, the currency could jump to the strongest level since May 2018 or plunge to its lowest point since the Brexit referendum in June 2016.
The possibility “that there may be no Brexit at all is not out of the equation,” said Kenneth Broux, a strategist at Societe Generale SA. “A second referendum would see a knee-jerk boost for the pound.”
The pound bulls’ best case is that the prime minister pursues a second referendum after losing the vote Tuesday, according to the survey. Respondents from the 11 banks assign just a 15 per cent chance to May’s deal passing the first time. They see a 25 per cent probability that the government will call a second plebiscite on exiting the EU: That would be the most supportive outcome for sterling, triggering a rally to $1.35 (Dh4.95) from about $1.28 now.
With the deadlock in Parliament raising the possibility that a Brexit deal won’t be approved by the March deadline, the idea that Britain could pursue an extension is gaining traction among traders, despite government denials. The market is now more pessimistic on sterling’s prospects in nine months than in three months.
A second referendum “could become the only way out of the mire if there was still an impasse in the UK parliament at the eleventh hour,” said Kathrin Goretzki, a currency strategist at UniCredit SpA. “This would likely provide some initial relief to markets that the near-term cliff-edge risks will either be avoided or delayed.”
A second referendum might be the most popular scenario with investors, but it’s potentially the most complicated outcome to achieve. There’s no majority in parliament for another vote; the opposition Labour party favours a general election over a rerun of the 2016 ballot.
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If there was a general election, the pound could drop almost 5 per cent to $1.22, according to the respondents. Sterling would suffer because of investor concern that a government led by Labour’s Jeremy Corbyn would boost taxes and spending, Nomura International Plc says.
The survey also suggests that the market is not priced for a no-deal Brexit, even though Britain has not much more than two months to strike a deal. Respondents put the odds of no deal at 15 per cent, the lowest probability of all the scenarios — but they see the pound plunging to $1.15 if that does happen.
The poll illustrates the challenges facing investors, with strategists assigning double-digit probabilities to at least five different outcomes. BNP Paribas switched on Thursday to recommending a long position in the UK currency, though it also said there’s a risk of as much as a 6 per cent drop.
Faced with such uncertainties, several clients are opting to avoid the UK altogether, according to Rabobank’s head of Group of 10 currency strategy, Jane Foley. Big food companies are looking east as an alternative to investing in Britain, she said.
“That won’t change until there is some clarity about the position,” she said. “Overall, there is a lot of concern about the potential pound volatility and the relationship with the EU over the next year or two.”
Not everyone is so cautious. The pound has already weakened more than 13 per cent since the Brexit referendum, and short positioning remains stretched. Hedge fund manager and Brexit backer Crispin Odey said this week he thinks Britain will eventually stay in the European Union and is positioned for pound gains as a result.