Sterling expanded gains
Sterling increased gains across the board as expectations grew that lawmakers could vote against leaving the European Union in 16 days time without a deal.
Its gains were bolstered by a tweet from the BBC’s assistant political editor that he was hearing Attorney General Geoffrey Cox had further legal advice which might help Prime Minister Theresa May win over lawmakers to her Brexit deal.
The British currency turned wildly between $1.30 and $1.33 in chaotic trading in the last 48 hours, but found some support at the beginning of the London trading at about $1.3150.
Prime Minister Theresa May has strongly lost the vote on her Brexit withdrawal agreement late Tuesday and parliament will have a separate vote Wednesday whether the UK should leave the European Union on March 29 without a deal.
May has given the lawmakers in her party a free vote, and investors expect parliament to vote against a no-deal Brexit – which, according to most economists, will cause significant harm to the economy.
“There should be an overwhelming parliamentary majority to prevent a no-deal exit on March 29, which should lend some support to the pound,” Morgan Stanley strategists said.
The pound rose 0.7% to the day’s high of $1.3163, putting the currency more than half way between this week’s lows of $1.2945 and its high of $1.3290.
The sterling was also stronger against the euro, reaching 85.86 pence, but was still below the 22-month high of 84,755 pence hit Monday, before the hopes for the May’s Brexit deal to pass were crushed.
Gauges of expected market volatility in the British currency showed some early signs of settlement after a brief spiking to their highest levels this year on Tuesday.
The one-month implied gauges of volatility remained around 11 vol and below a high of 13-vol reached on Tuesday.
The risk reversals on the pound, a ratio of puts to calls on the currency, is traded close to its lowest levels since December 2018 for a month, indicating that investors remain cautious about the prospect.
Despite the loss, some bank strategists expect an option of May’s deal to be passed by lawmakers.
“We think it will be the opportunity cost associated with rejecting the existing withdrawal agreement that begins to bind on the deal’s detractors,” Goldman Sachs strategists said in a note. They put the probability of a deal passing at 55 percent after a three-month extension.