Only since Boris Johnson's ascent to Prime Minister did the risk of no-deal Brexit rise, and with it, the potential for a massive Pound devaluation. The Pound has taken a hit to its valuation of the past several weeks, moving towards all-time lows of its trading range—it would be natural to think that this might be the end of the pain.
Back in May of 2016 before the EU Referendum when HMRC published its Immediate Economic Impacts of Leaving the EU, under a 'shock scenario' the Sterling exchange rate was expected to decline by 12%. The expected impact to Gross Domestic Product was computed to decline by 3.6%. In fairness, the likelihood of a no-deal Brexit was only about 5.0% prior to Mr Johnson's arrival at Number 10, so this was viewed as scaremongering by Brexit proponents and mostly ignored as unlikely by everyone else.
The current probability of the UK withdrawal without a deal is now ranked closer to 50%, so it's no surprise to see the UK economic picture has slipped rather sharply as well. Released just this morning:
Bottom line: The decline in global growth and slowing of UK domestic readings over the past months, makes the impact of a no-deal more dangerous than the 2016 report may have predicted. If you look at the real effective exchange rate—the nominal exchange rate adjusted for inflation and viewed as an index of trade weightings—the pound hasn't really shifted from its trading range despite the latest depreciation against the Dollar. This suggests the Pound isn't particularly undervalued even at current lows. A no-deal Brexit could easily result in the -12% decline predicted back in the 2016 HMRC report; that equates to about 1.0650 against the Dollar.
The Sterling Index continues to trade relatively flat while the Dollar Index has calmed since the market turmoil at the beginning of the week. This has translated in steady trading for the pair which has been bound to the 1.21-1.22 region since the beginning of the month. In yesterday's session, reports that UK Prime Minister Johnson might call an election the day after Brexit sent the pair to weekly lows of 1.2095, although the shock quickly died out.
The pair has traded heavy this week due to a flat Pound and a rallying Euro. The pair has tested the 1.0812 support level three times this week and briefly broke through in yesterday's session. UK data out today could be the catalyst for sustained trading below this support level.
Since Tuesday, the Euro Index has been supported by its 200-daily moving average having broken above the key level during Monday's market turmoil. The index continues to trade above this level this morning while the pair remains around the 1.12 figure.