Sterling could ‘fall to levels not seen since Margaret Thatcher’ in power

Sterling sank to a three-year low below $1.20 on Tuesday as prime minister Boris Johnson’s implicit threat to lawmakers to support him on Brexit or face an election sent investors rushing to dump British assets.

The pound, which has lost nearly 20 per cent of its value since Britain voted to leave the European Union in 2016, fell to as low as $1.1959 before rebounding after Johnson lost his working majority in the British parliament on Tuesday following the defection of one of his Conservative Party lawmakers. Barring an October 2016 flash crash when sterling briefly reached $1.15, sterling has not regularly traded below $1.20 since 1985 when Margaret Thatcher was in power.

Traders in London said heightened uncertainty was panicking investors, as the battle over Brexit reaches a crescendo this week. Many fear that Britain will either crash out of the EU without a transitional deal, or face an election that would generate more unpredictability when the economy is already struggling.

Oliver Blackbourn, a portfolio manager at Janus Henderson Investors, said sterling was “heading towards 1.10ish versus the dollar if we move towards a more negative outcome”.

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Any encouraging news would trigger a bounce in the pound because so many investors were betting against it, he said. Banks raised their estimates for the likelihood of a no-deal Brexit. UK domestic-focused stocks such as housebuilders skidded. Against the euro the pound fell to a two-week low of 91.47 pence.

Sterling did stage a rebound in late European trading, moving back into positive territory after Johnson lost his working majority in parliament when one of his lawmakers defected to the pro-EU Liberal Democrats.

Fritz Louw, currency analyst at MUFG, said that in the “immediate near-term”, the defection made a no-deal Brexit slightly less likely, but he added the bounce was likely to be short-lived. The pound hit as high as $1.2103, up 0.3 per cent on the day, and against the euro it last stood at 90.170 pence, 0.4 per cent higher.

Volatility

Neil Jones, head of hedge-fund currency sales at Mizuho bank, said many investors had preferred to bet on volatility rising rather than against sterling, since the pound could rise sharply should Britain secure a last-minute deal with the EU.

“The uncertainty plays both ways. A lot of participants fear having exposure at all,” he said. Volatility gauges for the pound have jumped as investors braced for swings in the weeks and months ahead , meaning investors betting on higher volatility would have banked a tidy profit.

Jones said that investors were more “bearish than they are short”, raising the prospect of more declines or a lack of support from buyers if the currency tumbles further.

The latest CFTC positioning data showed speculators trimming their short positions on sterling to $6.8 billion from $7.8 billion earlier in August, but that is still close to the largest since 2017. Adding to concerns about Britain’s economy, construction companies suffered the biggest drop in new orders last month since the depths of the financial crisis, a survey showed. - Reuters