The next UK prime minister is bad for the pound—whoever he is

Deal or no deal?
Deal or no deal?
Image: Matt Frost/ITV
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In just under a week, the contest to become the next leader of the UK Conservative party—and by extension, the country’s next prime minister—will come to a close. Traders aren’t waiting to find out who wins: they’ve already decided it’s bad news. Both candidates, current foreign secretary Jeremy Hunt and Boris Johnson, who previously held the same position, have pushed the UK on a path to a destabilizing “no-deal Brexit” at the deadline of Oct. 31.

In a debate yesterday, both said a crucial part of the previously negotiated exit deal—the Irish backstop, which is like an insurance policy to avoid imposing a hard border between Northern Ireland and the Republic of Ireland—had to be removed from any agreement between the UK and EU. But the EU has repeatedly said the backstop is an essential part of the withdrawal agreement.

With Hunt and Johnson thus raising the chances that a deal both sides can agree on won’t be reached by the Halloween deadline, the pound is down against its major peers. At the time of writing, sterling was 0.7% weaker against the US dollar and down 0.4% against the euro, despite better than expected labor market data published today.

“This story confirms both candidates have set themselves a self-defeating high bar for talks with the EU,” Jordan Rochester, a currency strategist at Nomura, wrote in a note today. “For now in the short term the news flow is awful and EURGBP could be entering a range around 0.9050 once again.” The pound-to-euro rate is currently trading at 0.903, and so the euro would only need to strengthen by about 0.2% to reach Rochester’s range, where it was at the start of the year.

The pound is the weakest currency among G10 currencies over the past day, past month, past three months, and past year, according to Ed Conway of Sky News. And according to an analysis by Bloomberg the outlook is set to deteriorate even further. The pound has weakened against the dollar in August for the past five years—that is, before and after Brexit—as traders tend to play it safe over the quieter summer months.