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LONDON: Sterling sunk to a three-year low below $1.20 on Tuesday, as Prime Minister Boris Johnson's implicit threat to lawmakers to back him on Brexit or face an election sent investors scrambling to dump British assets.

The pound, which has lost 20% of its value since Britain voted to leave the European Union in 2016, fell as low as $1.1959 before recovering.

Barring an October 2016 flash crash when sterling briefly reached $1.15, the British currency has not regularly traded at such levels since 1985, according to Refinitiv data.

Traders in London said heightened uncertainty was panicking investors, as the battle over Brexit reaches a crescendo this week.

Many fear that Britain will either crash out of the EU on Oct. 31 without a transitional deal, or face an election that would sow more unpredictability when the economy is already struggling.

Johnson on Monday implicitly warned lawmakers he would seek an election if they tied his hands on Brexit, ruling out ever countenancing a further delay to Britain's departure from the EU.

"The next 48 hours will determine whether or not this high- risk strategy from the prime minister has paid off, or whether or not he has been corralled into a corner, or conversely still there a several options where we are simply going for the uncertainty of an election mid-October," said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

Oliver Blackbourn, a portfolio manager at Janus Henderson Investors, said sterling was "heading towards 1.10ish versus the dollar if we move towards a more negative outcome". Any encouraging news would trigger a bounce in the pound because so many investors were betting against it, he said.

Lawmakers will vote on Tuesday on the first stage of their plan to block Johnson from pursuing a no-deal Brexit ahead of the Oct. 31 deadline.

Banks raised their estimates for the likelihood of a no-deal Brexit. UK domestic-focused stocks such as housebuilders skidded on concerns about a hit to the British economy.

Against the euro the pound fell to a two-week low of 91.47 pence, then recovered to 90.95 pence.

Sterling briefly rose as high as $1.2084, after UK lawmakers opposed to a no-deal Brexit applied for an emergency debate in parliament in a challenge to Johnson.

MORE BEARISH THAN SHORT

Neil Jones, head of hedge fund currency sales at Mizuho bank, said many investors had preferred to bet on volatility rising rather than against sterling, since the pound could rise sharply should Britain secure a last-minute deal with the EU.

"The uncertainty plays both ways. A lot of participants fear having exposure at all," he said.

Volatility gauges for the pound have jumped as investors braced for swings in the weeks and months ahead  , meaning investors betting on higher volatility would have banked a tidy profit.

Jones said that investors were more "bearish than they are short", raising the prospect of more declines or a lack of support from buyers if the currency tumbled further.

The latest CFTC positioning data showed speculators trimming their short positions on sterling to $6.8 billion from $7.8 billion earlier in August, but that is still close to the largest since 2017.

Adding to concerns about the British economy, construction companies suffered the biggest drop in new orders last month since the depths of the financial crisis, the latest IHS Markit/CIPS UK Construction Purchasing Managers' Index showed.

Copyright Reuters, 2019