The pound slumped to the lowest since 2016 as the prospect of a general election added an extra layer of complexity to the Brexit calculus.
Already under pressure from Britain’s brinkmanship over its departure from the European Union, sterling buckled on concern a national vote may either give Prime Minister Boris Johnson a mandate to quit the bloc without a deal, or usher in an anti-business Labour government instead. The uncertainty is taking its toll on the economy, exacerbating the currency’s weakness.
Sterling has fallen 20% since the referendum vote to leave the bloc in June 2016, with the currency a market barometer for political developments. Johnson said he would trigger a general election on Oct. 14 if lawmakers vote later Tuesday to force him to delay the Brexit departure date again beyond end-October.
“The latest pound weakness may reflect the fact that recent polls are suggesting that the pro-Brexit Tory party, Brexit Party and the DUP could come close to winning a majority and thus be able to deliver Brexit with or without deal,” said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA. “The pound outlook could continue to deteriorate as the day progresses and especially if an early election becomes likelier.”
The pound dropped as much as 0.9% to hit $1.1959, the lowest since Oct. 7, 2016. U.K. government bonds rallied to send 10-year yields down eight basis points to a fresh record low at 0.34%, as money markets increased bets on a Bank of England interest-rate cut this year.
A no-deal Brexit may see yields slide to zero or even lower, according to Citigroup Inc. The six-year U.K. note yielded the lowest on the sovereign curve on Tuesday, at just 18 basis points above zero.