The fragile support that Boris’s handshake tour of Berlin and Paris created for sterling last week has been obliterated over the last couple of days, as tonight’s crucial vote looms and the US dollar remains well bid among continued concerns over global growth.
There’s no doubt that elevated no deal risk is the overall driver of the current bout of sterling weakness, but the two year lows on GBPUSD should be seen in the context of the broad US dollar strength that we are currently seeing elsewhere.
The euro has also weakened against the dollar, leaving sterling weakened but not quite at a low for the year on a trade weighted basis. No-deal risk remains the be all and end all for sterling.
Given sterling’s falls over the past 6 months have been driven by an increase in no deal risk from an outside possibility to approximately 50% today, we estimate that the pound is likely to weaken by around a further 7% if no deal actually happens – taking GBPUSD to around 1.12 and EURGBP to just below parity.
Although the passage of blocking legislation may buy sterling some breathing room, a general election carries fresh risks due to the extreme amounts of uncertainty a poll will bring.
Labour is likely to run on a platform that includes outright appropriation of company ownership, while the Conservatives will for all intents be running on a no deal platform.
Voting intention polls will be worthless due to the impossibility of constructing a representative sample for an unprecedented four party election in the UK, but that won’t stop sterling from whipsawing on these as well as headlines on potential tactical voting deals between parties.
The only certainty from a General Election will therefore be uncertainty, and further sterling volatility.