The sterling slipped on Friday after survey data showed British factories slashing jobs in February but is headed for its biggest weekly rise in a month on receding fears that Britain will leave the European Union without a deal.
The British currency surged to multi-month highs this week after Prime Minister Theresa May said lawmakers would get to vote on a delay to Brexit if they choose not to approve her withdrawal agreement.
Traders backed off forecasts for a no-deal Brexit and began to expect a delay of the departure date beyond March 29.
That has ignited a rally in the pound and traders said barring a surprise, the pound was set to extend gains in the near term.
“Barring any major negative surprises in the near term, we could see Cable heading into the 1.36, 1.37 region with limited downside risk,” said Fritz Louw, a currency strategist at MUFG.
The pound edged 0.2 percent lower at $1.3240. For the week, it is up 1.5 percent. Against the euro, the pound was down by a similar magnitude at 85.88 pence.
Adding to the general tone of optimism over the near term were comments by British policymakers.
Bank of England Governor Mark Carney said this week the central bank would probably give more support to the economy if it suffers the shock of a no-deal Brexit, though its options are limited.
With the risk of no deal dwindling, implied volatility gauges, a measure of expected swings in the pound, extended their drop across the board.
Implied volatility usually rises when market participants hedge their positions before an event which may have a negative impact on a currency.
In the pound’s case, the countdown to Brexit day on March 29 has prompted companies and hedge funds to buy implied volatility, bracing for a sharp rise in price moves.
Three-month sterling/dollar implied volatility – a measure of expected price swings – is approaching five-month lows. Similar moves were seen in the far end of the curve, especially one-year segments.
But some market strategists advised caution after some lawmakers signalled their opposition to May’s offer of a vote on a delay.
British farming minister George Eustice resigned from the government on Thursday and former Brexit Secretary Dominic Raab said May’s Brexit deal with the European Union needs to change, particularly on the issue of the Northern Irish backstop.
“Sterling had to retrace some of its spectacular gains recorded earlier on in the week … a postponement is not something that the UK can chose as it pleases,” Commerzbank strategists wrote in a note.
Britain cannot unilaterally delay Brexit but needs the agreement of the other EU member states.
Weak data is also a factor. The IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI), a gauge of activity in British industry, fell to 52.0 from 52.6 in January, as expected in a Reuters poll of economists.
