Sterling bounces as UK lawmakers battle to avert no-deal Brexit

Madiha Shakeel September 4, 2019

LONDON: Sterling jumped more than half a percent against the dollar on Wednesday while volatility gauges on the currency eased after British lawmakers seized control of the parliamentary timetable to try to block a no-deal Brexit.

Lawmakers who defeated Prime Minister Boris Johnson’s government late on Tuesday are expected to introduce a bill in parliament on Wednesday seeking to stop Britain from leaving the European Union on Oct. 31 without transitional arrangements.

Johnson, meanwhile, is expected to table a motion for an early general election.

The latest sterling moves take it further off three-year lows of $1.1959 hit before the parliament vote. But more big price swings are likely as the battle over Brexit enters another crucial phase; possible outcomes range from a turbulent no-deal exit to abandoning the whole endeavour.

“The market will assume that the vote tonight passes,” said Kit Juckes, macro strategist at Societe Generale, noting that the government’s defeat in parliament had reduced the probability of a no-deal Brexit.

While that’s sterling-positive, the prospect of further prolonging Brexit uncertainty “will reduce sterling’s potential upside,” he added.

By 0950 GMT, the pound rose 0.7% to the day’s high of $1.2174, boosted also by a 0.3% dollar pullback that was sparked by Tuesday’s dismal manufacturing data.

Against the euro, the pound rallied 0.4% to 90.32 pence .

The British currency is now the second worst performing major currency year-to-date, according to Refinitiv data; if one were to disregard the lows plumbed during an October 2016 ‘flash crash’ episode, sterling’s Tuesday fall took it towards levels not seen since 1985.

Appetite for sterling was not dented even by weaker-than-expected services purchasing managers’ (PMI) survey, though the figures came as a reminder that Britain’s economy is in serious danger of entering its first recession since the financial crisis.

The PMI fell to 50.6 in August from 51.4 in July. A Reuters poll had forecast a smaller decrease to 51.

Meanwhile, as investors’ nerves calmed a bit, two-month implied sterling-dollar volatility, a contract that captures the Oct. 31 Brexit deadline, also eased off the three-year high it reached on Tuesday.

Many see the pound’s respite as shortlived, especially if snap elections are called, as that would open up a new set for scenarios including the possibility of opposition leader Jeremy Corbyn becoming prime minister.

“Not only uncertainty about the election outcome (thus various possible Brexit options) remains high, but the most probable alternatives don’t appear to offer much of a respite for sterling,” ING analysts told clients.

“We see Brexit/early election as under-priced by the market and look for more downside to sterling,” they added.

Copyright Reuters, 2019
 

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