GBP Tumbles on No-deal Brexit Rhetoric, US-China Talks Kick Off

The pound fell off the cliff yesterday as UK politicians, including the new PM Boris Johnson, ramped up rhetoric over a no-deal Brexit, prompting investors to increase bets with regards to such an outcome. In Japan, the BoJ kept its policy and forward guidance unchanged, noting that it “will not hesitate to take additional easing measures”. Market attention may now fall to the new round of US-China trade negotiations, which ends tomorrow.

Pound Collapses as Fears of No-deal Brexit Increase

The pound collapsed against all the other G10 currencies yesterday. It tumbled the most against NOK, CHF and EUR, while the currencies that eked out the least gains against their British counterpart were JPY and AUD.

What prompted market participants to start selling pounds was once again developments surrounding the UK political landscape, and especially Brexit. The first hit came by Michael Gove, the man in charge of no-deal preparations, who said that the government is working on the assumption that the EU may not be willing to strike a new deal with the UK. Although indeed the EU’s position remains that the accord agreed with the former PM Theresa May is not up for negotiation, Gove’s remarks suggested that the government may be considering a disorderly exit as the most likely outcome.

The no-deal rhetoric was ramped up by Foreign Secretary Dominic Raab, who said that they are “turbo-charging” their preparations with regards to exiting with no accord, adding that the “undemocratic” backstop must be dropped from the Withdrawal Agreement. He also said that they want a deal, but if the EU continues to be “stubborn”, they must be prepared for a no-deal exit. Raab’s remarks were echoed by Boris Johnson later in the day, although the Prime Minister rejected the claim that no-deal is the base-case scenario.

As for our view, we stick to our guns that the rising chances of a chaotic exit on October 31 stare likely to keep the pound in a downtrend. Even if someone argues that yesterday’s collapse to a 28-month low (against USD) means that the no-deal outcome may be priced in to a large extend, we believe that the worst is not behind us yet and that the pound still has room to move lower. Yes, the…