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Pound may slide to 2-year low with a hardline Brexit PM

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The pound may slide to a two-year low if a hardline eurosceptic takes over as the UK Prime Minister, according to a Bloomberg survey of analysts.

London

THE pound may slide to a two-year low if a hardline eurosceptic takes over as the UK Prime Minister, according to a Bloomberg survey of analysts.

Sterling could drop more than 2 per cent to US$1.24 in the event a Brexiteer such as front-runner Boris Johnson replacing Theresa May after she formally steps down on Friday, according to the poll. Still, the currency will avoid a bigger drop on conviction that Parliament will foil any efforts to leave the European Union without a deal.

While the survey sees a hardline Brexiteer taking over as the most likely scenario with a 70 per cent probability, analysts expect lawmakers to provide a barrier against a no-deal exit.

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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 eurosceptic Conservative Party.

"A PM who supports a hard Brexit does not necessarily mean a hard Brexit being materialised," said Petr Krpata, chief EMEA currency strategist at ING Groep NV. "There appears no majority in the Parliament for a 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 Mr 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 US$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 per cent probability and would also lift the pound to US$1.30. The pound has slumped 3 per cent in the past month to trade around US$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 UK 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 the pound would trade in a range of US$1.28-$1.34. BLOOMBERG