What the Brexit vote could mean for sterling

Traders are bracing themselves for huge volatility on European currency markets when they open this morning, after Theresa May’s Brexit withdrawal bill was resoundingly rejected by MPs.

Citigroup’s private banking arms has advised its wealthy investors to avoid trading the pound during what promises to be a highly tumultuous 24 hours for the currency.

Meanwhile, money transfer company TransferWise said it would limit users to moving £10,000 ($12,840) in or out of the United Kingdom today because of the “higher likelihood of exchange rate volatility”.

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“In recent years, traders have been looking at politics, rather than economic data, which means faster trading, and a faster pace of change in the price. That's the volatility traders talk about,” says the BBC.

“What will happen in the days after the vote is very difficult to predict” says CNN, but “the wide range of potential outcomes, and the seriousness of their consequences, presents a major challenge to currency traders.”

Above all money markets demand certainty. Sterling plummeted immediately after Britain voted to leave the EU as investors rightly predicted a prolonged period of political chaos.

“If you think about political uncertainty being bad, the worst outcome is a hard Brexit,” says Jane Foley, foreign exchange strategist at Rabobank Foley, because details of what will happen under those circumstances are so scarce.

She told The Daily Telegraph investors will “favour any outcome which appears to suggest a hard Brexit is off the table”, such as an extension to Article 50, and a second referendum “could be cautiously welcomed”.

Much will depend on whether Labour leader Jeremy Corbyn wins a motion of no confidence in the government.

“This would also throw up massive uncertainties over Brexit and be a very bearish cocktail for sterling and the UK economy and mean the [Bank of England] would be pushed to the back of the minds of market makers leaving sterling out to dry towards the post Brexit referendum low of 1.200,” says Ross Burland for FX Street.

“At this stage, an extension of Article 50 would likely be called which could temper the bears in due course bringing some support for sterling once again, but a fade on rallies would likely be the state of play for the foreseeable future,” says Burland.

In the short-term, Michael Brown, Senior Analyst at Caxton FX says a heavy defeat “would create further uncertainty and exert more downward pressure on sterling, likely in the region of 3–5% as an immediate reaction to the vote”.

By contrast, should Theresa May’s withdrawal act be voted through at a second attempt, sterling will most likely surge about 5% in value against the US dollar.

Capital Economics predicts that this would see the pound rally to $1.45 by the end of the planned transition deal in December 2020. A Brexit fudge or delay would cause the currency to strengthen to $1.40 by the same date, it says.

Barring the deal passing in Parliament, “perhaps the best-case scenario for the pound would be a delay to the article 50 process”, says Brown.

However, crashing out of the European Union without a deal would send it plummeting by 10% he said, which would see it drop to $1.12, its lowest level in over 30 years.