Sterling edged higher on Monday while derivative markets braced for a rocky ride as traders considered whether the British government might delay Brexit if Prime Minister Theresa May fails to secure support in parliament for her withdrawal deal.
Britain’s crisis over leaving the EU, scheduled to take place on March 29, is going down to the wire as May struggles to get the changes she says she needs from the bloc to get her deal passed by a divided parliament. She faces a growing risk that she will be forced to delay Brexit.
“From all the recent newsflow, it looks the United Kingdom is heading towards a softer form of Brexit with the majority leaning against a no-deal Brexit, though what the final outcome will be is still not clear,” said Nikolay Markov, a senior economist at Pictet Asset Management.
Expectations that the United Kingdom will be able to avoid crashing out of the European Union without a deal has helped the pound bounce 1.3 percent last week, snapping a three-week losing streak, and pushed stocks and yields up.
Goldman Sachs, for example, expects recent developments indicate a softer outcome such as a lengthy extension or a second referendum and assigns a low 15 percent probability to a “no-deal” Brexit.
The immediate focus for traders, however, is Wednesday when parliament votes on Brexit amendments.
Opposition Labour Party lawmaker Yvette Cooper’s amendment seeks to prevent a no-deal Brexit and may be passed as three government ministers have added their support.
The pound rose as high as $1.3099 on Monday, up 0.3 percent on the day before trimming gains to stand 0.2 percent up at $1.3075. Against the euro sterling was broadly steady at 86.80 pence.
BUBBLING UNCERTAINTY
One-month sterling implied volatility – a measure of expected price swings in the pound – has risen, as traders get nervous about more possible parliamentary votes on the Brexit process.
The uptick in expected swings for the pound is in sharp contrast to a general drop in volatility in the currency markets with actual moves in major currencies falling back towards seven-month lows.
Cautious optimism about some sort of an imminent Brexit breakthrough is reflected in the currency derivatives markets with one-month pound risk reversals, a gauge of calls to puts on the pound, close to one-month highs.
The government is considering different options, including possibly delaying Brexit, if parliament fails to approve May’s deal by March 12. The EU has said it will consider an extension to the Brexit process, but only if Britain can offer evidence that such a delay would break the deadlock in parliament.
“I expect GBP appreciation if May loses the ability to put pressure on MPs (Members of Parliament) by threatening a no-deal scenario,” said Ulrich Leuchtmann, head of FX research at Commerzbank.
