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LONDON: Sterling fell sharply on Monday as Boris Johnson summoned his ministers for an emergency meeting, fuelling expectations the prime minister was preparing to call a snap election should lawmakers this week vote to delay Brexit.

Opposition lawmakers are expected to propose legislation on Tuesday - the first day back after the summer recess - to force the government to postpone Brexit beyond the Oct. 31 deadline, which Johnson has vowed to stop happening.

The Sun newspaper reported that Johnson could call an election as early as Wednesday, and cited a source close to him saying he wanted the poll to be held before the European Council summit on Oct. 17 and 18.

Sterling dropped more than 1% to as low as $1.2036 - not far from its more than two-year low of $1.2015 touched in August - as talk of an imminent election mounted. Against the euro it declined as much as 0.8% to 91.090 pence.

"The Prime Minister is willing to resist all attempts to prevent a no-deal Brexit..." said Kit Juckes, currency strategist at Societe Generale. "A no-deal Brexit is partly, but not wholly priced in," he added.

Sterling traders are bracing for the battle for Brexit to enter the endgame this week but the range of possible outcomes, from an election to a no-deal Brexit to another delay, is vast.

Opposition lawmakers, and possibly ruling party rebels, could seek to either change the law, or the government, in their drive to block what they say would be an economically damaging no-deal Brexit. Many want the government to ask the EU for a delay to the Oct. 31 Brexit deadline.

Johnson has threatened to expel any rebel lawmakers from his Conservative Party if they try and vote to prevent a no-deal exit.

Expectations of further price swings in the pound jumped, with the two and three-month implied volatility gauges reaching their highest since December 2018.

According to the latest positioning data, speculators cut their short positions against the pound but - at $6.8 billion - the size of the bet against sterling remains near its biggest since 2017, underscoring international investors' deep unease with the current political uncertainty in the UK.

Last week, Johnson's government announced parliament would be suspended for around a month in what critics called an attempt to squeeze the time lawmakers had left to try and stop a no-deal Brexit.

"If GBP was looking remarkably resilient to UK political news at the end of last week, its nerve has given way this morning. The pound has fallen sharply in European hours ahead of what promises to be a week full of twists and turns in Westminster," Rabobank said in a research note.

Separately, a widely-watched survey on Monday showed that British manufacturing contracted last month at the fastest rate in seven years, adding to worries about a significant downturn in the UK economy.

The August Purchasing Managers Index for Britain's manufacturing sector came in at 47.4, against a forecast of 48.4 in a Reuters poll of economists. An already weak pound was little moved as Brexit dominated trading.

Copyright Reuters, 2019