Pound tumbles to more-than-two-year low amid Brexit uncertainty

British pound has plunged against US dollar and euro after UK PM Boris Johnson threatened snap election over Brexit.

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MPs will vote on Tuesday on the first stage of their plan to block Johnson from pursuing a no-deal Brexit ahead of the October 31 deadline [File: Chris Ratcliffe/Bloomberg]

The pound has plunged against the dollar and the euro after British Prime Minister Boris Johnson threatened to call a snap election to push through Brexit, with analysts warning the currency could fall even further.

Johnson’s signal that he will call a poll for October 14 if rebel MPs in his Conservative party vote to force another delay to Brexit raised the possibility of an extended period of uncertainty in the United Kingdom, where the economy is already struggling.

“We are leaving on October 31, no ifs or buts,” Johnson said in a statement outside 10 Downing Street, his official residence, on Monday. 

Sterling – which sank about one percent on Monday – dropped briefly to $1.1959, its weakest level since January 2017. The pound has lost 20 percent of its value since the UK voted to leave the European Union in 2016.

Barring an October 2016 “flash crash” when sterling momentarily tanked as low as $1.15, the UK currency has not regularly traded at these levels since 1985.

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The euro was also sitting around levels not seen since the second half of the same year, as investors prepare for a huge day in Westminster with anti-Brexit MPs planning to hold a vote on their return from the summer break on Tuesday.

“The continued political uncertainty will do nothing to lift sterling from its torpor,” Neil Wilson, chief market analyst at Markets.com told AFP news agency. 

“There is more downside risk and very little to give bulls encouragement … we are very much in uncharted waters here. We could feasibly see $1.15 or even $1.10 in the coming weeks if traders decide to move against the pound.”

The cost of uncertainty

The battle over Brexit may reach a crescendo this week, with Johnson’s implicit warning on Monday that he would seek an election if MPs tied his hands on Brexit effectively ruling out the possibility of a further delay to the UK’s departure from the EU, its largest trading partner.

MPs will vote on Tuesday on the first stage of their plan to block Johnson from pursuing a no-deal Brexit ahead of the October 31 deadline. 

Investors are panicking that the UK will either crash out of the bloc on October 31 without a transitional deal to ease the divorce or face a parliamentary election that sows uncertainty at a time when the economy is struggling with a global slowdown exacerbated by a trade war between the United States and China

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Banks raised their estimates for the likelihood of a no-deal Brexit and UK domestic-focused stocks such as housebuilders skidded lower as concerns about a hit to the UK economy grew.

“The next 48 hours are potentially quite significant, and sterling shows you that,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments told Reuters news agency.

“The next 48 hours will determine whether or not this high-risk strategy from the prime minister has paid off, or whether or not he has been corralled into a corner, or conversely still there are several options where we are simply going for the uncertainty of an election mid-October.”

Milligan said sterling on a fair value basis looked undervalued after much of the uncertainty had been priced in, but he added: “As we see with many currencies in extreme circumstances, it is very easy for a currency to hit an air pocket.”

Source: News Agencies