Sterling inched slightly higher this morning against the dollar and euro after losses in recent days but options markets indicate more pain ahead as the risk of a no-deal Brexit under new leader Boris Johnson is seen worsening economic stress.
We are awaiting Johnson’s speech due later in the day after Britain’s Queen Elizabeth formally appoints him as prime minister. He won the Conservative Party election with a campaign to take the UK out of the European Union by Oct. 31 whether or not transitional trading agreements are in place.
Many fear Johnson could pitch the country into a showdown with the European Union and trigger a constitutional crisis at home, given lawmakers have pledged to bring down any government that tries to force a damaging no-deal Brexit. UK economic data has been dismal in recent months, with a recession seen likely.
Focus in particular will be on (Johnson’s) choices for the prominent cabinet positions and for any insight into his strategy of how he plans to deliver Brexit by 31 October.
While a no-deal Brexit risks have risen, most analysts see the probability as less than 50%. Nor do options seem to be fully pricing a no-deal scenario, with implied volatility well below levels seen before the original March 31 Brexit deadline.
Many reckon also that sterling moves will be contained until there is greater clarity on the Brexit front, given that the currency has fallen more than 6% since May versus the dollar and that parliament goes into recess on Thursday until September.