Sterling could move to parity with the euro "and possibly beyond" in the event of a "messy" no-deal Brexit, a currency expert has warned.
Investec’s Gearóid Keegan raised the prospect of the another level shift in the euro-sterling exchange rate if the UK crashes out without a deal.
However, this was still a worst-case scenario to which Investec ascribed a low probability, he said.
"We continue to hold out hope that the UK will see sense and agree to an amended version of [Theresa] May's deal, or take the offer of a short extension mentioned by incoming EU commission president Ursula Van der Leyden yesterday," he said.
Investec downgraded its outlook for sterling after UK prime minister Theresa May tendered her resignation and with the prospect of Boris Johnson, a staunch Brexiteer, succeeding her, predicting it was likely to reach 91p against the euro in the short term.
However that rate was nearly reached this week after both Tory leadership candidates said they were not willing to accept the so-called Irish backstop element of Mrs May’s Brexit deal, raising the risk of a no-deal outcome.
"If a no-deal becomes more likely, we feel that significant further deterioration of the pound is a possibility," Mr Keegan said.
“For euro-sterling, previous post-Brexit highs just above 0.93p and 0.94p would certainly be achievable even in the case of a so called ‘managed’ no deal, while a messy no deal could will see euro-sterling hit parity and possibly beyond,” he said.
“Although we would note that a no-deal exit would also be bad for the euro zone and the euro, which may limit some of the sharpest moves,” he said.
Employers’ group Ibec has warned of imminent business closures in the wake of another significant slide in the value of sterling particularly in the low-margin agri-food and manufacturing sectors.
Sterling is currently trading at just over 90 pence against the euro, having been at 77pence prior to the UK’s referendum on EU membership last year.
Ibec chief executive Danny McCoy has said previously that if sterling was to stay above 90p, certain UK-reliant businesses with limited credit lines and balance sheet resources would face closure within the quarter.
“There’s no doubt – at 90 and rising – that pain threshold is hurting everybody in the low-margin space that’s exposed to the UK market,” he said
KBC Bank economist Austin Hughes said as long as the no-deal risks continue to build sterling will remain vulnerable “particularly as thinner trading conditions through summer months tend to prompt larger movements”.
Investment
“In addition, the UK economy looks less attractive of late on postponed investment, both in business and housing and tentative signs of a more cautious consumer,” he said.
However, Mr Hughes said two factors are likely to limit the scale of losses for the moment, "perhaps to another penny or so".
“First of all markets are still very much of the view that even if it takes to the last minute, a no-deal Brexit can be avoided and second, FX markets look at the relative attractiveness of currency pairs,” he said.
“To sell sterling you have to find another currency you might want to buy,” he said.
"With the Federal Reserve set to cut rates later this month, Trump-related risks because of his preference for a more competitive exchange rate and concerns about poor corporate earnings, the dollar has its own problems at present," Mr Hughes said.
"Similarly, a faltering euro economy, expectations for an European Central Bank-easing, uncertainty about the direction of EU policy after the elections and ongoing worries about Italy, the euro appears vulnerable," he said.
The possibility of a “no-deal” Brexit has sent investors scurrying to brace for greater volatility in the pound, with three and six-month implied volatility gauges jumping in recent days while traders ramped up short futures positions in the pound.
“In a hard-Brexit scenario, I could see sterling-euro at parity,” said Goodbody economist Dermot O’Leary.
“The move in the past few weeks has been a reflection of the heightened risks and is justified in my view. I do believe though that ultimately the House of Commons will move to prevent a no-deal outcome, thus we are likely to see the rate to return to circa 85p after this occurs,” he said.
Nonetheless, Mr O’Leary said: “The volatility throughout October in particular is likely to be as big as we have ever seen.”
