Sterling dips as possibility of UK general election grows

LONDON: Sterling hit a one-week low against the euro and dipped against the dollar on Thursday after British Prime Minister Theresa May lost two Brexit-related votes in two days, fuelling speculation she will soon face a general election.

Britain's main opposition Labour Party will demand a general election if May loses a vote in parliament over her Brexit plans next week, its leader, Jeremy Corbyn, is expected to say on Thursday.

The by the possibility of a Corbyn government implementing high-spending policies weakened the British currency. But expectations for sterling volatility fell as Wednesday's vote also appeared to reduce the chance of a no-deal Brexit.

British lawmakers have demanded that the government come up with a plan B within days if May loses the vote on her Brexit deal on Jan. 15.

"[Wednesday's] vote ... undermines the prime minister's authority and brings up the possibility of a general election. She has lost two votes this week alone now," said Societe Generale FX strategist Alvin Tan.

Sterling reached a one-week low against the euro of 90.53 pence before settling around 90.3 pence, down 0.1 percent on the day. It also dropped 0.20 percent against the dollar to $1.276 .

Even so, the risk that sterling will fall against the dollar was deemed the lowest in over four months, according to one-month risk reversals, a gauge of market positioning.

Expectations for sterling price swings have also diminished in the last few sessions, with investors now expecting less implied volatility over a one-month period.

The last time a vote on May's Brexit deal was scheduled, in mid-November, the measure of sterling volatility climbed to a two-year high, even though the vote was eventually postponed. It's now set for Jan. 15.

The fact that implied volatility is dropping before the vote suggests concerns are not as high now, according to Societe Generale's Tan.

"The vote implies that parliament is taking a more muscular approach and asserting itself on the policy process, which in turn implies the probability of a no-deal Brexit has fallen," he said. "You can see that reflected not so much in the spot exchange rate but in the implied vol."