Sharp moves in GBP and VAR Capital views

I am sure you have seen the sharp move in GBP recently. Since the latest high of 1.33 in March 2019, sterling has depreciated against the dollar almost 8.5% to the current 1.215 as the risk of a no-deal Brexit significantly increased.

Why this is happening?

The market is clearly catching up with the view that hard Brexit is definitely a possibility and has therefore been weighing on GBP. Even though the market sentiment seems quite negative already, we do not expect any quick relief and expect the pound to continue to struggle in the short term.

What are the impacts on my portfolio?

Weak sterling tends to be beneficial for the largely internationally exposed FTSE 100 but despite this usual currency correlation, we believe the market may experience a period of sentiment driven volatility. We continue to be cautious on the UK market.

Also, our portfolios holders should not worry due to the following reasons:

1. Our equity portfolios are well diversified across regions and currencies
2. We recently took profits, thus reducing our allocation to equities and gearing more towards defensive equities
3. Our bond holdings continue to be shorter duration

What will happen to GBP?

While we do not intend to get into the business of forecasting short term currency movements, we would like to share the below thoughts highlighting what we believe to be the three most likely scenarios affecting the near term direction of GBP.

1. Extension of Article 50 (50% chance)
   1. Hard Brexit is blocked by the parliament and a snap election is called through a vote of no confidence. The result of this election would be highly uncertain and all current options would remain on the table for the medium term – hard Brexit, soft Brexit or second referendum. This period of uncertainty would then neither significantly support, nor depress sterling but volatility could stay elevated.
   2. GBPUSD 1.15 – 1.30 (could be a lot higher in the case of second referendum)

1. No deal (25% chance)
   1. No new deal is agreed by the October 31^st deadline and hard Brexit is not blocked by the parliament – the UK leaves the EU without a deal in place.
   2. GBPUSD 1.00 – 1.15

1. Minor changes to the Withdrawal Agreement and exit under those terms (25% chance)
   1. Boris Johnson makes some minor changes to the current Withdrawal agreement and manages to win over parliament’s approval. UK leaves the EU with some deal by the October 31^st deadline.
   2. GBPUSD 1.3 – 1.4