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LONDON: Sterling slumped below $1.20 on Tuesday to a three-year low, as Prime Minister Boris Johnson's implicit ultimatum to lawmakers to back him on Brexit or face an election sent investors scrambling to dump British assets.

The pound, which has now lost 20% of its value since Britain voted to leave the European Union in 2016, fell to as low as $1.1959, down nearly 1% on the day.

Barring an October 2016 'flash crash' when sterling momentarily tanked to as low as $1.15, the British currency has not regularly traded at these levels since 1985.

The battle over Brexit is reaching a crescendo this week. Johnson on Monday implicitly warned lawmakers he would seek an election if they tied his hands on Brexit, ruling out ever countenancing a further delay to Britain's departure from the European Union, its largest trading partner.

Lawmakers will vote on Tuesday on the first stage of their plan to block Johnson from pursuing a no-deal Brexit ahead of the Oct. 31 deadline.

Investors are panicking that Britain will either crash out of the bloc on Oct. 31 without a transitional deal to ease the divorce, or face a parliamentary election that sows uncertainty at a time when the economy is struggling with a global slowdown exacerbated by a trade war between Washington and Beijing.

Banks raised their estimates for the likelihood of a no-deal Brexit. UK domestic-focused stocks such as housebuilders skidded lower as concerns about a hit to the British economy grew.

"The next 48 hours are potentially quite significant, and sterling shows you that," said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

"The next 48 hours will determine whether or not this high risk strategy from the prime minister has paid off, or whether or not he has been corralled into a corner, or conversely still there a several options where we are simply going for the uncertainty of an election mid-October."

Milligan said sterling on a fair value basis looked undervalued after much of the uncertainty had been priced in, but he added: "As we see with many currencies in extreme circumstances, it is very easy for a currency to hit an air pocket."

Against the euro the pound's decline was much more contained on Tuesday, falling 0.2% to a two-week low of 91.33 pence.

Morten Lund, a senior currency analyst at Nordea, said he expected the pound to weaken further against the euro and beyond a three-year low of 93 pence touched in August.

"It's difficult not to see a route where this doesn't end in an election," he said.

Volatility gauges for the pound jumped as investors braced for more wild swings in the weeks and months ahead  .

Copyright Reuters, 2019
 

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