Sterling extended this week’s gains on Wednesday as investors bet that a no-deal Brexit was less likely and that Britain’s departure from the European Union would be delayed.
With the risk of no deal apparently dwindling, sterling has reached its highest against the dollar since September 2018 and its best level versus the euro since May 2017.
The pound also touched its strongest against a basket of its trading partners since April last year.
British Prime Minister Theresa May onn Tuesday offered lawmakers the chance to vote in two weeks for a no-deal Brexit or to delay Britain’s exit from the European Union if her attempt to ratify an agreement fails.
With a majority of lawmakers believed to oppose a no-deal Brexit, May’s move opens up the possibility of a delay, removing the immediate threat of a disorderly exit on March 29.
The pound rose 0.3 percent to as high as $1.3286 in early European trading. It gained 0.2 percent against the euro, to 85.795 pence per euro, below Tuesday’s high of 85.63 pence. It’s gained 4.5 percent versus the euro this year.
Still, uncertainty remains around when Britain will leave the EU and on what terms, making investors are nervous.
“Given the developments of the last few days, an extension is becoming more likely,” asset manager Amundi said in an email, cautioning that it was preparing for a “several months extension with prolonged uncertainty, not the technical extension that would very probably come with a deal scenario”.
Two-month sterling/dollar implied volatility – a measure of expected price swings – is approaching three-month lows as no-deal Brexit concern eases. Two-week implied volatility rose as traders hedged the risks around the March 12 and March 14 parliamentary votes.
May has said if Brexit is delayed, it must be a short delay because the EU has said Britain needs to hold European elections if it is still a member beyond July 2.
Marshall Gittler, currencies strategist at ACLS Global, said May would use that deadline to give members of parliament an ultimatum.
“Her strategy is to take Britain to that cliff edge and say `now it’s either my deal or no deal,’ and hope that MPs vote for the deal,” he said. “I think that might work, which would be positive for GBP. But it’s a hell of a way to run a country.”
