Sterling hits six-month low over no-deal Brexit concerns

UK currency faces volatile future dependent on trade talks and the path of the US dollar.

The pound faces another period of falls due to the increasing chance of a no-deal Brexit, as trade talks between the UK and European Union (EU) turned sour.

Rises in the pound over the summer months came to an end as the currency suffered a sell-off over concerns about the UK crashing out of the EU with no deal.

The pound to US dollar has now hit a six-month low of $1.29 and is now nearly 3% per cent lower than the recent nine-month high of $1.35.

However, sterling is still significantly up from $1.14 in March, which was its worst rate against the US currency in 35 years. The pound was just below $1.50 before Britain voted to leave the EU in the June 2016 referendum.

Giles Coghlan, chief currency strategist at forex broker HYCM, said the recent rise in sterling was “largely driven by the US dollar weakness”, so “we saw a lot of appreciation in the pound that fundamentally didn't make sense”.

Coghlan says: “Now we're back from the parliamentary summer recess, we're back to sorting out Brexit. We've only got six weeks to properly get some kind of deal.”

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Prime Minister Boris Johnson has given an October 15 deadline for a post-Brexit trade agreement with the EU, brushing off fears about  “no-deal” chaos if talks fail. The UK government will today publish plans that could override key elements of its Brexit deal, in breach of international law.

Saxo Bank currency expert John Hardy said in an FX update: “Sterling is slowly waking up to the risk of another cycle of ‘no-deal’ fears as Boris Johnson has taken a hyper-aggressive turn in drawing up possible plans to renege on the very terms that made the Brexit deal possible in the first place, and vowing that October 15 is a negotiation deadline.”

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The squeeze on the pound will continue for the next few weeks as expectations increase that trade negotiations will fail, according to Nigel Green, chief executive and founder of deVere Group.

“If the talks fail and there’s a no-deal Brexit, the already vulnerable pound will take another hit.”

He predicts the pound could fall to 1.20 against the dollar. 

But it is not all bad news for the UK currency’s short-term future.

Coghlan said if there is a no-deal Brexit, the pound will go back down to record lows, but if a deal is struck then a lot will depend on the path of the dollar.

“It takes one moment for the agreement to be reached and then all of a sudden, any downside in the pound can be reversed quickly. If we see further dollar weakness - which I am anticipating in the medium term given the huge amounts of US fiscal monetary stimulus - and if a decent Brexit deal is struck, the pound will rise against the dollar,” he said.

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