Pound pundits believe the UK is unlikely to exit EU by March

[LONDON] Currency strategists are starting to doubt that the UK will exit the European Union by the end-March deadline.

The market is focusing on a potential extension to Article 50 and an eventual deal or second referendum, rather than a no-deal scenario that would see the pound crash, strategists say. Still, that leaves little conviction for the pound to rally in the short term given the political uncertainty.

Options bets are still in favor of selling the pound as the government steps up preparations in case Britain crashes out of the bloc without a deal in March. Prime Minister Theresa May is opposed to a second referendum and is pushing back against calls for Parliament to get votes on the different options.

"Our base case is actually that the government will ask for an extension of Article 50 to get more time to negotiate a new deal that has a chance of passing in Parliament," according to currency strategist Thu Lan Nguyen.

The reduction in volatility over the two to three month horizon suggests "the market sees increasingly a chance of a postponement of important decisions, which would be in line with our base case."

The pound will "remain in limbo" until the Brexit outcome is clear.

"The most likely scenario is that Article 50 is delayed and buys the Prime Minister time," according to Mizuho Bank's head of hedge fund currency sales Neil Jones.

This would see "an initial rally for the pound but it will not last as it elevates uncertainty."

MUFG bank "expects a no deal to be avoided," according to analyst Lee Hardman.

"We still think a deal of some sort will get through Parliament but I don't think we should entirely rule out Article 50 being extended," says strategist Kenneth Broux from Societe Generale.

"A Parliament 'no' vote is priced in to some extent but I am still of the view that pound rallies are a sell until we finally have that vote in the new year."

Mr Broux sees a negative bias on the pound until the outcome is clearer, with intermittent short covering rallies thanks to 'scenario gaming'.

The strategist puts the probability of a deal at 75 per cent, no deal at 20 per cent and sees a 5 per cent chance of a second referendum.

BLOOMBERG