The pound’s decline has shown no signs of stopping and the struggling currency could fall even further as Britain’s new leader Boris Johnson plays hardball with the European Union over Britain’s exit from the European Union.
Boris Johnson and his new cabinet have ramped up the no-deal Brexit rhetoric in recent days.
The pound GBPUSD, -0.4584% dropped to 28-month lows of $1.2120 on Tuesday before clawing back some ground to $1.2167.
Markets fear a no-deal Brexit, which could be a reality come Halloween if Johnson sticks to his plan to leave on October 31 no matter what.
The Bank of England’s worst-case scenario would see sterling crash to parity with the U.S. dollar for the first time in its history.
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However, Johnson has previously suggested no-deal must stay on the table as a negotiating tactic. and his pledge to leave the EU at the end of October no matter what could yet prove to be a hollow threat.
Karen Ward, chief EMEA market strategist at JP Morgan Asset Management said even if Johnson was bluffing it may still get worse for the pound before it gets better.
“We suspect that much of the current ‘no deal’ rhetoric is designed to rattle the EU into agreeing to reopen the withdrawal agreement.”
She added: “While ‘no deal’ is still not our expected outcome, the newsflow—politically and economically — is likely to get worse before it gets better so sterling may have further to fall.”
The pound could yet rebound in a number of scenarios that could move Britain away from the threat of no-deal.
A general election, analysts predict, could lift sterling back towards $1.20 — $1.30 depending on the outcome, while a second referendum with a remain victory could see it hit $1.40.
However if Johnson sticks to his pledge of leaving on October 31, and the EU refuses to budge, then the pound could slide even further towards $1.15 or lower still.
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The future path of the pound is intrinsically linked to the future path of Brexit.
The risk of a no-deal Brexit may have been priced in but the actual scenario is still not fully expected by investors and could still shock the pound.
In the meantime markets will follow every single second of Boris Johnson’s game of chicken with the EU — expect volatility ahead.