Early European trading saw the pound suffer its worst fall since November 2, when it hit $1.3043 following the Bank of England’s announcement to raise interest rates for the first time since the financial crisis.
“The market would be wise to keep an eye on the news flow in the days ahead, but I think the risks will pass,” Pickering continued. This is because, as he wrote in a recent research note, “We see a good chance that the U.K. agrees in principle to the formula for the divorce bill set out by the EU by the end of the year.”
The so-called divorce bill is how much the U.K. could pay to fulfil its remaining obligations to the EU as it leaves the bloc. Any potential agreement would reduce the perceived risk of a no-deal “hard Brexit” scenario, Pickering said, “and would likely have (a) positive effect on business confidence and the sterling exchange rate.”
Meanwhile, Simon Derrick, chief currency strategist at BNY Mellon, advised against rushing to conclusions. “The key is not to assume that a leadership challenge must lead to a ‘no confidence’ vote in Parliament,” he said.
And even if so, a change in Conservative Party leadership would not automatically lead to a general election — thanks to country’s Fixed Term Parliaments Act, an early election requires two-thirds of MPs voting in favor.
