Brexit nerves set pound on track for biggest monthly drop in a year

LONDON - 30 May 2019: The pound held near a four-month low against the dollar and the euro on Thursday as investors remained sidelined amid the contest to succeed Prime Minister Theresa May.

May’s imminent departure deepens the Brexit crisis as a new leader, who should be in place by the end of July, is likely to want a more decisive split with the bloc, raising the chances of a confrontation with the EU and potentially a snap parliamentary election.

While nearly a dozen candidates are vying for the top job, Boris Johnson, the bookmakers’ favourite, has said Britain should leave the EU on Oct. 31, the current deadline, with or without a deal.

“The risk of a no deal and no Brexit have both increased and that’s why volatility remains low,” said Colin Asher, a senior economist at Mizuho.

“The problem is both extremes have become likely and you don’t want to bet the farm on either.”

More than half the banks canvassed by Reuters have increased their probabilities of a no-deal Brexit - though parliament’s resolute opposition to Britain crashing out without a trade deal means that probability is still seen as low.

Against the dollar, the pound was broadly steady at $1.2629, not far away from a four-month low of $1.2605 hit last week. Versus the euro, the pound was at 88.15 pence.

On a monthly basis, the pound was on track for its biggest monthly drop since June 2018, according to Refinitiv data.

Gauges of expected swings in the pound over the coming months remained firm with six-month implied volatility rising to its highest levels since April 2019.

Britain’s finance minister on Thursday warned those in his party vying for the role of prime minister that a no-deal Brexit would threaten the United Kingdom’s cohesion and that they should tone down irresponsible spending pledges.