Daniel Trum, a currency strategist at UBS, and Dean Turner, UBS’ chief UK economist, wrote in a note sent to clients on Wednesday: “At current levels, the currency is still pricing in a benign outcome. A hard Brexit could easily see sterling lose another 10%, in our view.”
The risk of a no-deal Brexit, also called hard Brexit, is seen as rising after the events of the last two weeks.
Theresa May’s Brexit deal was rejected for a second time by MPs last week. The prime minister was then blocked by the House of Commons speaker from introducing a third vote unless her deal changes in a meaningful way. The EU have signalled they are not willing to reopen negotiations on the agreement, only “clarify” its contents. That leaves the path to ratifying a Brexit deal unclear.
Further increasing the risk is the fact that May has ruled out asking for a long extension to the Brexit negotiating period. She wrote to European Council president Donald Tusk on Wednesday asking for an extension to 30 June. However, the EU are understood to only be willing to grant an extension till late May. It will also only be offered if MPs back May’s deal.
Unless May can get her MPs on-side or convince the EU to grant an extension without approval of her deal, the default position remains that Britain will leave the EU in eight days – on 29 March.
“We believe a no-deal exit will be prevented by MPs, but as the clock runs down, the risk of an accident grows,” Trum and Turner wrote. “Moreover, delaying Article 50 does not eliminate the risk of a no-deal exit. Many paths can yet lead to this outcome.”
UBS reiterated its advice for clients not to trade sterling and instead hedge against any downside risk from the currency.
Deutsche Bank also downgraded its outlook for the pound on Thursday. Analyst Oliver Wright cut his outlook for the currency to a “neutral” rating as he raised his forecast odds of a no deal Brexit to 20%.
Wright also said that a long extension to the Brexit negotiating timeline would also be negative for the pound.
“Such an extension would alleviate the near-term risks around Brexit, but would raise the odds of a new election and would therefore inject new political and policy uncertainty into the UK,” strategist Jim Reid wrote in a morning note, summarising Wright’s views.
In a separate note on Wednesday night, UBS strategist John Wraith wrote: “A no-deal exit would in our view lead the market to anticipate lower rates, and a return of both QE and the term funding scheme over the turbulent months we would expect to be triggered in that scenario.”
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.