Brexit: Pound sterling could fall to parity against the euro if UK fails to secure EU trade deal, analysts say

Dire predictions come as the Prime Minister makes emergency trip to Brussels to try to break deadlock in divorce talks

(Reuters)

A ‘no-deal’ Brexit could see the pound will fall to parity with the euro for the first time ever and slump as much as 17 per cent against the dollar, analysts have warned.

The dire predictions come after Theresa May admitted last week that the government was spending £250m on contingency preparations in the event of a deal falling through. It later emerged Labour and Conservative MPs were in talks over a parliamentary veto to prevent the UK crashing out of the EU without a deal in 2019.

Petr Krpata, chief EMEA foreign exchange strategist at ING said no deal and no transition period would have “severe consequences for the UK economic outlook" and lead to further devaluation of sterling, which has already suffered heavy losses since last June’s Brexit vote. The pound would move from €1.13 per pound towards parity with the euro and fall from $1.33 to $1.20 against the dollar.

Roger Hallam, currency chief investment officer at JPMorgan Asset Management, predicted that the pound would fall to one-to-one with the euro and 1.15 against the dollar.

He said that the UK “underestimates the complications” of a hard Brexit scenario – meaning no transition deal and the UK relying on World Trade Organisation Rules to buy from and sell to the EU.

This would result in a “sharp drop in exports, business investment and confidence, and the UK flirting with recession”, he said.

He predicted that the Bank of England would then cut interest rates to zero, reversing rate hikes that will likely be delivered during late 2017 and early 2018, leading to devaluation of the UK currency.

Adam Cole, FX strategist at Royal Bank of Canada said his current prediction is for the pound to be at $1.33 against the dollar by the end of next year, with one euro buying 85p. But sterling would be worth around ten per cent less than those valuations if the Government doesn't secure a transitional deal, he said.

HSBC analysts, Dominic Bunning, David Bloom, and Daragh Maher said: “The UK government has argued at times that no deal is better than a bad deal, but we would expect no deal to be a very bad deal for GBP.

“The uncertainty unleashed regarding every aspect of the UK’s relationship with the EU … would be enormous.

"This would of course affect the treatment of trade in goods and services, but it would also touch on numerous other areas including citizens’ rights, air travel and the Irish border for example. We would expect GBP-USD to trade around 1.10 under this ‘no-deal’ scenario, below the lows seen during the flash crash of October 2016."

In the shorter term, the pound edged up against the dollar on Monday, as investors bet that the Office for National Statistics would report higher inflation on Tuesday, increasing the likelihood the Bank of England would increase interest rates.

There was also hope that Ms May would move Brexit negotiations along as she flew to Brusels for an emergency meeting with top EU officials.

Last week was volatile for sterling as conflicting reports emerged on the progress of Brexit negotiations. The pound fell close to half a cent against the dollar in less than a minute after German government spokesman Steffen Seibert said time was running out for a deal.