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Markets brace for Brexit Pound parity potential

Markets brace for Brexit Pound parity potential

(13 August 2019 - United Kingdom) The concept of 'pound parity' between the Great British Pound Sterling (GBP) and US Dollar (USD) seems less beyond the realms of possibility as the risk grows that the United Kingdom (UK) may fall out of the European Union (EU) without a deal in an increasingly likely 'Hard Brexit' scenario.

This growing view is not consensus yet however with a Bloomberg survey estimating that the pound will slide to US$1.10 should the UK exit the bloc without an agreement. The Bank of England (BoE) was quoted in Q4 2018 that the GBP could depreciate below US$1 in an analysis on possible worst-case Brexit scenarios. Options-based calculations identified a 6.4 percent chance of pound-US dollar parity in the next year, significantly higher than 0.2 percent in Q1 2019 when prospects of a no-deal outcome were becoming increasingly slim.

"The pound is at a much lower level now, but I still think a no-deal exit would lead to significant volatility and we could be testing parity on a really bad outcome," said Rupert Harrison, a fund manager at BlackRock who manages more than US$10 billion in assets. "We will see this game of chicken continue through August and that's likely negative for sterling" he commented on the Brexit talks that have currently hit a stalemate. "There is a way of threading the needle that provides an upside sterling risk, but I would not make that a central case" he added.

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