Lingering downside risk to sterling

With the pound having recently weakened to a two-year low of $1.24 and the markets seemingly no longer pricing in the possibility of official interest rate hikes if there’s a Brexit deal or delay, there may be more upside to the pound than is widely appreciated. That said, the main driver of the pound over the next few months will remain the markets’ perception of the chances of a no deal Brexit. As the markets currently ascribe around a 30% chance of the UK leaving the EU without a deal, there is clearly scope for a rise in that probability to drag the pound lower. (See Chart 1.) That would especially be the case if, now that he’s Prime Minister, Boris Johnson cements his “do or die” stance on leaving the EU on 31st October 2019.