The British pound slumped to a 28-month low on Monday, as the UK’s new government stepped up its talk of a no-deal Brexit, causing investors to react with alarm.
Sterling dropped to below $1.22 and €1.10 on Monday, spooking markets as Cabinet ministers indicated a no-deal Brexit could be likely.
Although markets have been aware for months that Boris Johnson, a leading Brexiteer, was likely to become Britain’s next prime minister, heavy selling has hit sterling in July, causing financiers to worry that it could hit parity with the dollar.
US bank Morgan Stanley said on July 17 that the sell-off caused by a no-deal Brexit could push the pound into a one-for-one exchange rate against the US currency.
Other banks were slightly more cautious but they did not paint a rosy picture of sterling’s future in a no-deal scenario.
“Sterling should remain under pressure and head toward $1.20 levels over the coming months if early elections materialise and the Conservative party under PM Johnson runs on a ticket of a divisive Brexit stance versus the EU," Petr Krpata, a currency strategist at ING Groep, told Bloomberg.
As the pound slumped on Monday, Mr Johnson sent mixed messages on whether the UK would leave the EU without a deal.
He said he was working on an assumption that Britain could get a new deal but insisted the country must be prepared for a no-deal if the EU refused to restart negotiations.
Mr Johnson has continued to say that the contentious Irish border backstop plan was dead.
The backstop is designed to prevent the return of a hard border between Northern Ireland and the Republic of Ireland by provisionally keeping the UK in the Customs union with the EU.
Downing Street warned on Monday that Mr Johnson would not begin talking to EU leaders about Brexit until they agreed to his demand to reopen the divorce deal they struck with his predecessor Theresa May.
But so far, the EU has refused to reopen the deal.
Other members of Mr Johnson’s Cabinet have also said that Britain must be ready to leave with no deal.
On Sunday, prominent Brexiteer Michael Gove said that the government was "working on the assumption" that the UK would have a hard exit, which is now "a very real prospect".
After Mr Johnson visited Edinburgh to hold talks with First Minister Nicola Sturgeon on Monday afternoon, the Scottish leader issued a stern warning, saying the government was taking a "dangerous" path towards a no-deal Brexit.
