Sterling dropped 1% against the dollar
Sterling dropped by almost 1% against the dollar on Thursday, retreating from the 9-month highs, as traders braced for this week’s third parliamentary Brexit vote, this time on whjether to delay Britain’s March 29 deadline for exiting the European Union.
The pound on Wednesday enjoyed its biggest one-day gain against the dollar since last April after British lawmakers resoundingly voted to reject a no-deal Brexit.
Investors await the result could prompt eurosceptic parliamentarians to finally back the unpopular agreement that Prime Minister Theresa May is negotiating with the EU or causing a long Brexit delay which eventually can change the outcome of the 2016 referendum.
Both scenarios might be positive for sterling by ruling out a disorderly exit from the European Union.
However, some of the optimism has given way, with no sign that lawmakers can reach a consensus to amend May’s agreement so that it is acceptable to all sides and the EU.
Tim Graf, head of macro strategy at State Street Global Advisors, said the chances of no-deal Brexit had dropped to less than 5% and have described himself as positive on the pound. But he warned that risks still remain.
“”There is gradual optimism being priced in … It’s clear parliament are starting to exert themselves more forcefully,” Graf said.
But he added: “There is always the chance the EU won’t grant an extension if they are just going to be trying to push this deal through … that’s where the caution comes in.”
Lawmakers will vote later Thursday to postpone the UK’s departure from the EU after March 29. However, all 27 EU Member have to approve the extension.
May also urges lawmakers to vote next week on the deal, which they have twice rejected.
Sterling this week swung wildly between $1.30 and $1.33, and at junctures it has been at its most volatile since the June 2016 Brexit referendum.
It rose by more than 1% against the dollar and the euro on Wednesday after parliament voted strongly against leaving without a transition agreement.
It reached a peak of $1.3380. Against the euro it had traded as high as 84.72 pence, approaching recent 22-month highs.
Later, however, it retreated from these levels as traders considered the array of possibilities that have opened up, including a second referendum or general election.
By 1045 GMT the pound was 0.9% lower at $1.3229. Versus the euro, it was down 0.6% at 85.46 pence.
Options markets show that sterling volatility – measuring expected currency swings – is still boosted by two-week vols jumping of one-week lows hit on Wednesday.
Volatility may also stem from amendments lawmakers have filed before the vote; one looks for a second Brexit referendum while the other is about to rule it out. If the former is passed, the pound might rally even more, based on the hopes that voters will turn the results of the original 2016 referendum.