(Bloomberg) — U.K. Prime Minister Boris Johnson’s move to suspend Parliament increased the risk of a no-deal Brexit and sent the pound plunging, but strategists see a silver lining for sterling.
The closure of the debating chamber on Sept. 12 could focus the minds of both U.K. lawmakers and the European Union on stopping a crash exit on Oct. 31., according to Credit Agricole (PA:) SA and Deutsche Bank (DE:) SA. That could provide support in the near term to sterling for MUFG and ING Groep (AS:) NV.
“The latest developments may also increase pressure on officials to find alternative solutions to the Irish backstop issue,” said Manuel Oliveri, a strategist at Credit Agricole (PA:). “Speculative investors have been retaining excessive shorts and such conditions may still mean that better levels could be reached in coming weeks.”
held its ground above $1.22 Thursday, after falling 0.5% this week. Morgan Stanley (NYSE:) sees a strategic buying opportunity if sterling slides further to $1.15, an almost 6% drop. Here are analyst comments on the currency’s outlook:
Deutsche Bank (DE:) (Sees No-Confidence Vote)
- “The most likely political strategy being pursued by the U.K. government is in fact to engineer a no deal Brexit at the end of October, followed by a snap election,” writes Deutsche Bank (DE:) strategist Oliver Harvey.
- Still, the next focus for the market will be on the strategy adopted by anti-no deal MPs next week.
- The bank sees a 50% chance of a successful no-confidence motion before Sept. 10 or in late October; then, a 30% chance this leads to unity government, followed by elections, 20% chance it instead leads to no-deal.
Morgan Stanley (NYSE:) (Pound a Buy at $1.15)
- The pound is likely to come under renewed selling pressure as the suspension of Parliament is seen increasing the risk of a no-deal Brexit, write Morgan Stanley (NYSE:) strategists including Hans Redeker in a note.
- If the currency breaks support at 1.2060/1.2015, it opens the potential for a “strategic buying opportunity” at $1.15, say the strategists.
MUFG (Pound to Bounce Short-Term)
- “Upping the ante in this manner has clearly focused the attention of those determined to oppose a no-deal Brexit,” notes MUFG Bank analyst Lee Hardman.
- Leader of the opposition Jeremy Corbyn has already committed to bring motions forward to debate legislation delaying Article 50 on Sept. 3. The Japanese bank expects the speaker of the House of Commons, John Bercow, to allow them to be debated.
- Those motions passing would “support the pound in the near term”, writes Hardman, who thinks it could also bring forward a vote of no confidence in the government.
ING (Pound to Weaken Into EU Summit)
- Pound weakness will build into the mid-October EU summit, testing the euro-sterling multi-year high of 0.9325 reached earlier this month, write ING analysts including Petr Krpata.
- The Dutch bank sees the U.K. Parliament delivering a vote of no confidence in the government in the weeks between the EU summit and the Oct. 31 deadline, paving the way for an early election.
- This will stabilize the pound, but the analysts write that it is “still too early to position for the eventual pound rebound at this point as we believe things will get worse before they get better.”
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