More downside ahead for sterling amid Brexit no-deal risk

Mike Ingram, chief market strategist at WHIreland, told IGTV’s Victoria Scholar that we could see more downside for the pound as cable slumps to an 11-month low amid a rising risk of Britain ‘crashing out’ of the EU. Meanwhile, Ingram says last week’s rate hike by the BoE could be rolled back this year.

The British pound is under pressure, with GBP/USD falling below $1.29 for the first time since last September amid concerns about a no-deal scenario on Brexit as the March 2019 deadline draws closer. Sterling also slumped against the euro (GBP/EUR), depreciating to a nine-month low. According to the Commodity Future Trading Commission (CFTC) data, speculative net shorts on the pound are at the highest level since the third quarter (Q3) of last year with bearish sentiment beginning to rise from the start of Q2 this year. The options market is echoing this pattern with sterling-dollar risk reversals at a 17-month low, indicating stronger demand for put options, which give investors the right to sell, providing protection against a slide in sterling.

According to recent foreign exchange (FX) research from Scotiabank, ‘GBP bears have been adding to their gross shorts for much of the past two months and have pushed the bearish net short to a fresh multi-month wide at levels last seen in mid-September. GBP bulls have liquidated 70% of their gross long position since mid-April’. WHIreland’s Mike Ingram told IGTV that the pound could fall to lows not seen since 2016 or beyond. However, he says this will not necessarily translate into strength for the FTSE 100, which also depends on the outlook for oil.

Last week, Bank of England (BoE) governor Mark Carney warned of an ‘uncomfortably high’ risk of Britain leaving the EU without a deal, sparking a sell-off in sterling. The currency faced further downward pressure after UK trade secretary, Liam Fox, told the Sunday Times ‘the intransigence of the Commission is pushing us towards a no-deal’, forecasting a 60-40 chance of a no-deal on Brexit. Ingram told IGTV there is ‘certainly not an immaterial chance’ of the UK crashing out of the EU.

Read more about Mark Carney and how he's affecting the markets

The BoE raised rates on 2 August 2018 to 0.75% from 0.5%, a move that was widely anticipated, so much so that sterling fell in the afternoon’s trading session. However, Amit Kara, at the National Institute for Economic and Social Research (NIESR), told the Telegraph newspaper, ‘it is entirely possible that in three months’ time, because of the Brexit negotiations, or because of the trade wars, or for some other reason, it might look like the August rate increase was a mistake’. WHIreland’s Ingram told IGTV that it is entirely possible that the rate hike last week could be rolled back later this year.

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