LONDON: The British pound rose on Tuesday as opposition parties vowed to try and pass a law to prevent a no-deal Brexit at the end of October, encouraging traders to buy sterling even though most fear the country is headed for a disorderly exit from the EU.
Parliament returns from its summer break next week and is preparing for a battle with Prime Minister Boris Johnson, who has pledged to take Britain out of the European Union on Oct. 31, with or without an exit agreement.
Labour leader Jeremy Corbyn on Tuesday hosted talks with other opposition parties and they agreed to try and stop a no-deal Brexit, including through passing legislation that would force Johnson to seek a delay to Brexit. [nL5N25N3R0
The pound extended its earlier gains after the statement.
Sterling rose more than 0.7% on the day to hit as high as $1.2310, its strongest since July 29, before giving up some of those gains to trade at $1.2259.
The British currency also hit a one-month high versus the euro at 90.17 pence, before steadying at 90.58 pence per euro .
Investors are growing increasingly concerned that Britain is headed towards a no-deal Brexit on Oct. 31 that could disrupt trade flows and weaken the economy, though some also believe the currency has moved too far downwards.
“We are slightly positive on sterling in our portfolios as we think that a hard Brexit is already priced into the markets,” said Ugo Lancioni, managing director of global fixed income and currency management at Neuberger Berman.
“Though there is a risk that the pound could fall another 5% from these levels in a knee-jerk reaction to a hard Brexit, these levels are attractive. Also, in the case of a hard Brexit, the (Bank of England) BoE might launch a stimulus package.”
Despite Tuesday’s moves, many investors are sceptical about the opposition’s ability to stop Johnson.
Speculators cut their short positions against the pound in the week to Aug. 23, according to the latest CFTC positioning data, although outstanding shorts – at around $7 billion – remain close to their highest level in more than two years.
“Sterling’s limited reaction to the trade tensions tells us the market’s focus is clearly on Brexit,” UBS global wealth management strategists said in a note on Tuesday, referring to the trade conflict between the United States and China.
“If the global economic outlook turns sour, the Bank of England could have to change tack and join the global central bank easing bandwagon. Thus, we acknowledge that risks have risen of the pound appreciating somewhat less than we forecast.”