The pound dipped below $1.25 this week as the prospect of a “no deal” Brexit hardened but forecasters have suggested the pain for holidaymakers and importers could worsen depending on what happens behind the door of No. 10.
The spectre of dollar parity – where £1 buys just $1 – is most likely to be raised in the event of a withdrawal from the EU without a formal agreement, economists said.
A radical left-wing government under Jeremy Corbyn would also see sterling plummet.
Freefall: how the pound lost a fifth of its value
The pound’s strength against most other currencies was dealt an almighty blow following the 2016 referendum outcome, falling close to 20pc from 2015 highs, and economists have said the 31 October deadline to leave the EU remains the biggest factor.
Boris Johnson, the Tory leadership front runner, said Britain will leave the EU “do or die”, yet following through with this and invoking a no-deal Brexit could push the pound down to nearly par with the dollar – lows not seen this century.
Samuel Tombs, an economist with consultancy Pantheon Macroeconomics, said a no-deal Brexit in the autumn would see the pound hit $1.05. Paul Dales of Capital Economics was slightly more optimistic but still predicted the pound would fall to $1.15.
In that scenario, foreign investors would likely sell British and pound-denominated assets, triggered by uncertainty over the country’s economy and political landscape.
Mr Tombs said the Bank of England would cut interest rates, which would bring additional downward pressure on the currency.
Yet, experts also said a series of events could see the pound rise.
A managed Brexit in October, with the next PM securing a deal with the EU, would push sterling to $1.35 according to Mr Tombs.
If Britain does not leave the trading bloc in October, but no deal is swerved, neither predict much of a positive reaction. In that case, the pound is expected to languish around its current $1.25 level.
Should the Government execute a complete reverse ferret and remain in the EU, then Mr Tombs suggested the pound could go back towards its pre-referendum level of $1.40.
Brexit is not the only aspect weighing on the currency. The prospect of a Jeremy Corbyn-led government is also weighing on stock and currency markets.
If the country was to go to the polls, Mr Tombs suggested a Tory majority would see the pound go to $1.20 whereas a Labour government could mean a rate at closer to $1.30.
Labour’s spending plans could result in the Bank of England raising interest rates more quickly than a Conservative government, he said. Higher rates are generally supportive for currency.
Mr Dales said Labour’s policies in key areas might cancel each other out. Its softer stance on Brexit (Mr Corbyn is not thought to be leaning towards a second referendum) which boost the pound, while his anti-business rhetoric could spark capital flight.
He said: “Investors would be concerned about Labour’s high tax and lower profits policies. They may also be concerned by a gradual erosion of their property rights, for example if Labour nationalises some industries and doesn’t adequately compensate investors.
“Our hunch is that the negatives would outweigh the positives, resulting in the pound being lower than other scenarios, under a Labour government,” he said.
For the week's most important personal finance news, analysis and expert advice, from pensions and property to investment ideas and savings tips, sign up to our weekly newsletter.