Sterling rises before key Brexit vote; volatility hits 5-month highs

LONDON: The pound rose against the euro and a broadly weaker US dollar on Monday, boosted by improved risk appetite in global markets, while investors waited for UK lawmakers to vote on a bill which the European Union has told London to scrap.

Sterling had its worst week in six months last week, as investors grew more pessimistic about the chances of a Brexit deal being reached before the December 2020 deadline.

Britain threw Brexit trade talks into disarray last week by proposing legislation that would break international law by breaching parts of the Withdrawal Agreement which was signed in January.

Lawmakers are due to debate and vote on the proposed bill, called the Internal Markets Bill, today.

The EU says it cannot trust those who break agreements and that if the bill is not effectively scrapped there will be no trade deal to cover Britain when it leaves the customs union and single market at the end of 2020.

"If the bill succeeds it ups the ante on a no-deal to 50:50," said Neil Jones, head of FX Sales at Mizuho.

"It would certainly set off alarm bells - there'd be a lot of sell signals," he said.

Before the vote, the pound rose, as global risk appetite got a boost from coronavirus vaccine hopes as AstraZeneca resumed clinical trials.

At 1423 GMT, the pound was at $1.2897, up 0.8% on the day but still close to 7-week lows.

Versus the euro, it was up around 0.5%, at 92.09 pence per euro.

One-month implied volatility hit new five-month highs, indicating increased expectations of future price swings .

Sterling-dollar overnight implied volatility also rose to its highest since early April.

"We expect the pressure on GBP to continue building this week as not enough risk premia is priced into the currency relative to the urgency of the situation," ING strategists wrote in a note to clients, saying they expect cable to head towards $1.25 this week.

But Goldman Sachs said that the chances of a damaging no-deal Brexit are "meaningfully lower" than the market is implying, making sterling attractive for investors who are willing to look through the short-term volatility.

The European Commission will delay making a decision on the City of London's euro clearing, a derivatives industry source said.

Elsewhere, tighter restrictions on social gatherings in England came into effect on Monday, after coronavirus infections in the UK rose to around 3000 per day.