The pound has sunk to a 28-month low as the UK government under new Prime Minister Boris Johnson says it is ramping up preparations for a no-deal Brexit on October 31. The pound was below $1.2150 as of Tuesday morning, with gilt yields tumbling in tandem.
Reports from within the Johnson government have suggested that officials are preparing for Brexit talks with the EU to fail, driving the pound’s value down against every G10 currency. Michael Gove, the new chancellor of the Duchy of Lancaster responsible for no-deal preparations in the Cabinet Office, stated the government is “operating on the assumption” that negotiations would fail.
“Michael Gove’s comments over the weekend on how the government is ‘operating on the assumption’ that the UK will leave the European Union have certainly not helped matters for the battered Pound. With uncertainty over Brexit set to mount ahead of the October 31 deadline, the Pound is fundamentally bearish,” said Lukman Otunuga, senior research analyst at FXTM.
Investment bank Morgan Stanley has warned in a research note that a no-deal Brexit could plunge the pound to parity with the US dollar – beating the all-time low set in 1985 when the UK had to exit the European Exchange Rate Mechanism, otherwise known as Black Wednesday.
“The GBPUSD has already tumbled to a fresh 28 month low below 1.2150 this morning, and has scope to test 1.2000 if a solid daily close below 1.2100 is achieved,” added Otunuga.
Johnson has publicly insisted that there will be no face-to-face talks with the EU unless it drops the Irish backstop, and has pledged to leave the EU by October 31 regardless.