LONDON (Reuters) - Sterling would rally substantially if Britain leaves the European Union with a deal but weaken further if no such accord is reached, a Reuters poll showed on Friday.
After suffering its biggest loss against the euro in two years in May - and also losing ground against the dollar - the pound coasted through June as markets awaited the outcome of a Conservative Party leadership battle to become Britain’s new prime minister.
It is still not clear how, when, or even if Britain will leave the EU, and the results of the two-horse race to become leader due on July 23 could steer that eventual outcome.
Former London Mayor Boris Johnson, the face of the official 2016 campaign to leave the EU, is expected to beat Foreign Minister Jeremy Hunt to the job.
Johnson has a more hardline stance on Brexit and has said Britain must leave the EU on Oct. 31 “deal or no deal”.
If it’s no deal then one pound, worth around $1.26 on Thursday, will only get you between $1.17 and $1.25 in the month after the two sides part ways, according to the median estimate in the July 1-4 poll of currency strategists.
“If we do leave with a ‘no-deal’ then economic worries would escalate. There wouldn’t be the huge shock that the result of the referendum was, but it would obviously cause huge waves in the market,” said Tony Nyman at Informa Global Markets.
But if Britain leaves with a deal, sterling will rally to between $1.30 and $1.36, the poll found, still well short of where it was trading before the June 2016 referendum decision to leave the EU.
“If there is a positive conclusion in talks then sterling would motor,” Nyman added.
Reuters polls of economists taken since the surprise decision to leave have consistently said the two sides would eventually agree a deal. Medians in the wider poll of around 70 foreign exchange strategists suggest they echo that view as they see the pound strengthening.
In one month a pound will get you $1.26. In six months it will be worth $1.28, and in a year sterling will be 5% stronger at $1.32.
Those forecasts are a touch weaker than in June’s poll despite increasing expectations the U.S. Federal Reserve will cut interest rates.
A Reuters poll last month suggested the Bank of England would raise Bank Rate next year, but weak economic figures and a speech by Governor Mark Carney on Tuesday have convinced money markets to price in a rate cut over the next 12 months.
By the end of September, the European Central Bank will either cut its deposit rate or ease its forward guidance further by pledging to keep interest rates lower for longer, keeping the euro in check.
Sterling is therefore predicted to gain a little ground against the common currency. On Thursday one euro would get you about 89.7 pence but in year one will only be worth 88.0p.
Polling by Indradip Ghosh and Vivek Mishra; Editing by Ross Finley and Hugh Lawson