GBPUSD: Pound can crash if hard-Brexit fears loom

Financial Mirror (Cyprus) - - MARKETS - Mar­kets Re­port

It is no sur­prise the Brexit news­flow con­tin­ues to dic­tate sud­den fluc­tu­a­tions in the Bri­tish Pound. Al­though what is sur­pris­ing is that de­spite there be­ing less than six months re­main­ing be­fore the United King­dom is sched­uled to leave the Euro­pean Union with min­i­mal con­fi­dence a Brexit deal is close, in­vestors still refuse to price into ex­pec­ta­tions that there is a po­ten­tial even­tu­al­ity of a hard-Brexit.

The Bri­tish Pound trad­ing close to 1.32 at time of writ­ing pro­vides mem­o­ries of re­cent his­tory where in­vestors have been caught off-guard by po­lit­i­cal risk events. The his­toric out­come of the EU ref­er­en­dum springs to mind as an ex­am­ple of this and with the clock tick­ing fast un­til the dead­line for a Brexit deal, in­vestors should be more aware of po­ten­tial down­side risks to the Pound.

At the mo­ment, in­vestors seem to be con­tent with op­ti­mism that a Brexit agree­ment will even­tu­ally be struck. I think we just need to look at the events fol­low­ing the re­cent meet­ing in Salzburg and the de­fi­ant com­ments made by UK Prime Min­is­ter Theresa May af­ter the sum­mit to rec­og­nize that any op­ti­mism that a deal is close should be faint.

Even if a break­through in Brexit ne­go­ti­a­tions is even­tu­ally struck, the up­side po­ten­tial in the Bri­tish Pound is lim­ited to around 5%. This is low in com­par­i­son to how fast the Pound could crash if a hard-Brexit is the even­tual out­come. The Pound is at risk to crash­ing back down to the lower 1.20’s if in­vestors be­come fright­ened over a hard-Brexit.

There are no short­ages of rea­sons for in­vestors to hold neg­a­tive views on the Bri­tish Pound. The as­sertive com­ments from Theresa May fol­low­ing the failed Salzburg meet­ing that no a Brexit deal is bet­ter than a bad deal heav­ily high­lights how strained UK and EU re­la­tions have be­come dur­ing the long-winded ne­go­ti­a­tions. The EU is ob­vi­ously not want­ing to pro­vide UK of­fi­cials with any fa­vors to pre­vent other pop­ulist par­ties around Europe gain­ing en­cour­age­ment from le­niency shown to­wards the UK, sug­gest­ing that Theresa May will con­tinue to strug­gle against EU of­fi­cials.

What is also not supporting Theresa May in her quest to se­cure a Brexit deal that is fair for those who voted to leave the EU two years ago is the on­go­ing and re­lent­less spec­u­la­tion over her po­si­tion re­main­ing at threat to a po­ten­tial lead­er­ship chal­lenge. Re­ports over an­other po­ten­tial UK elec­tion refuse to go away and in­vestors need to see sta­bil­ity with lead­er­ship po­si­tions at a time where it is com­mon knowl­edge that the UK will go through a pe­riod of un­cer­tainty. The po­ten­tial for a hos­tile Tory Party Con­fer­ence for Theresa May in early Oc­to­ber might pro­vide en­cour­age­ment for in­vestors to take profit on Pound po­si­tions.

All of the above doesn’t mean that there is no pos­i­tive news out there for the Pound. The prob­lem with cur­rent val­u­a­tions is that in­vestors are not po­si­tioned, or pre­pared at all for a po­ten­tial hard-Brexit shock. Pos­i­tive news for the Pound in­cludes the con­tin­u­a­tion of UK eco­nomic data de­fy­ing wor­ry­ing fore­casts of what the out­come for the UK econ­omy would be fol­low­ing the EU ref­er­en­dum shock, and the prob­a­bil­ity that the Bank of Eng­land will re­main ahead of the Euro­pean Cen­tral Bank and Bank of Ja­pan (when it comes to pro­vid­ing guid­ance on the pos­si­bil­ity of higher

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