Sun, 05 Jul 2020

Currency strategists are ruling nothing out for Saturday's crucial parliamentary vote on Britain's deal to exit the European Union - and that makes forecasting where sterling will settle something of a crapshoot.

The pound could surge to $1.35 or slip to around $1.26, strategists and fund managers say as they assess the range of possible outcomes from Brexit's climactic moment.

Sterling already jumped 5% this month to around $1.29 and now it's pinned to that marker as traders wait to see if Prime Minister Boris Johnson can convince sceptics in the House of Commons to approve the divorce deal he sealed this week. It's fine margins, and if he can't, that opens the door to other scenarios including an election, a second referendum, or even a move to leave the EU with no agreement in place.

While Johnson's accord has lowered the likelihood of a no-deal Brexit on October 31, the risks "are not mathematically zero," say strategists at Toronto-Dominion Bank, including Ned Rumpeltin.

EU and UK say they have reached a deal on Brexit

"Any positions predicated on an imminent no-deal crash-out look difficult to countenance at this stage," said Rumpeltin, the European head of currency strategy at TD. "Looking forward however, we think it is still a little too early to sound an unqualified all-clear."

If Parliament does manage to pass the deal this week, the pound could test May's peak of around $1.3185, the TD strategists forecast, though they see it struggling to move higher in the absence of fresh catalysts.

UBS Global Wealth Management is more bullish. It's retaining an overweight position in sterling against the dollar, said Chief Investment Officer Mark Haefele. A "convincing deal" could drive the pound to $1.35, he predicted.

Searching for votes

Johnson needs 61 of 85 possible votes from potential swing lawmakers, a tight but feasible number. One blow is that Northern Ireland's Democratic Unionist Party, with 10 potential supporters, came out firmly against the deal.

If lawmakers were to reject it and that led to an extension beyond the Octover 31 Brexit deadline, the risk of a general election would "suck the wind" out of sterling's rally and see it test $1.2640-60, the TD strategists predict. And that level could come under significant pressure if Parliament's blocking of the deal were followed by the EU rejecting a request for an extension to the Brexit deadline.

Other scenarios - including a potential second referendum that could cancel Brexit altogether, or an election that could cement Johnson's leadership and seal his deal - cannot be ruled out either.

No wonder implied volatility on sterling is so high and risk gauges are swinging back and forth. And adding to the drama, the currency market won't get its first chance to react to the twists and turns of the weekend until trading resumes at 7 p.m. local time (or 7 a.m. in Auckland), when liquidity can be limited and exacerbate price swings.

"No deal remains a threat until either a deal or no Brexit is completed," Rumpeltin said. "An unexpected jump to an alternative scenario would quickly return both rates and FX to the state of confusion and - often - contradiction that has defined much of the Brexit process so far."

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