(Bloomberg) -- The pound may slide to a two-year low if a hardline Brexiteer takes over as the U.K. Prime Minister, with a bigger drop avoided on conviction that Parliament will foil any efforts to leave the European Union without a deal.
Sterling could drop more than 2% to $1.24 in the event a euroskeptic such as frontrunner Boris Johnson replaces Theresa May after she formally steps down Friday, according to a Bloomberg poll of currency strategists. While the survey sees a hard Brexiteer as the most likely scenario with a 70% probability, analysts expect lawmakers to provide a barrier against a no-deal exit.
The pound’s fortunes have ebbed and flowed since the 2016 EU referendum along with the chances of a Brexit deal. With May stepping down after failing to get her agreement with Brussels through a divided Parliament, some of her leadership rivals are trying to put a no-deal exit back on the table as they seek support from a euroskeptic Conservative Party.
“A PM who supports hard Brexit does not necessarily mean a hard Brexit being materialized,” said Petr Krpata, chief EMEA currency strategist at ING Groep (AS:INGA) NV. “There appears no majority in the Parliament for hard Brexit and also the PM, when elected, may loosen his or her current hard Brexit stance.”
Conservative lawmakers will whittle down the field of 11 leadership hopefuls this month to a final pair voted on by party members. Apart from Johnson, who has warned the Tories face “extinction” if Brexit is delayed, prominent Brexiteers in the race include former Brexit Secretary Dominic Raab, who suggested he could suspend Parliament to force a no-deal exit -- drawing a rebuke from Speaker John Bercow.
Other frontrunners such as Environment Secretary Michael Gove and Foreign Secretary Jeremy Hunt would be open to extending the deadline to leave the bloc again beyond Oct. 31. That scenario was also seen as likely by the 12 in the poll, with a two-thirds probability, and would drive the pound up to $1.30.
The other currency-positive scenario would be for a Tory leader with a softer approach to Brexit, which is seen as less likely at a 30% probability and would also lift the pound to $1.30. The pound has slumped 3% in the past month to trade around $1.27 after a strong start to the year, and saw a record string of losses against the euro in May.
“We now see a rising chance that the U.K. will be compelled to ask the EU for a further delay to Brexit,” said Mark Haefele, global chief investment officer at UBS Wealth Management, predicting that would see the pound trade in a range of $1.28-$1.34. “This would, in turn, raise the probability of a snap general election or second Brexit referendum.”
While most candidates are keen to avoid the Brexit impasse leading to an election, following a drubbing for the Conservatives in last month’s European parliamentary vote, an election victory for the opposition Labour Party is seen as the worst scenario for the pound, driving sterling down to $1.20.
Whoever takes over from May will still have to deal with Brussels, which does not want to reopen the divorce talks. That is keeping many investors in U.K. assets on the sidelines, and is reflected in the survey seeing the pound anywhere between $1.15 and $1.40.
“The new prime minister will be facing similar problems,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. “The range of expectations and outcomes are pretty broad and wide ranging so it makes it remarkably difficult to predict the pound.”