LONDON, Sept 5 — The pound surged to a five-week high today after lawmakers voted to prevent Prime Minister Boris Johnson taking Britain out of the EU on Oct. 31 without a transition agreement and his brother Jo quit the government, citing the national interest.
Political uncertainty remained high as the prime minister renewed his effort to seek an election on Oct. 15 after a first attempt was defeated yesterday. But sterling responded to a sense that a ‘no-deal’ Brexit had been averted for now.
“Removing the immediate threat of a ‘no-deal’ Brexit has helped the pound recover some of its recent weakness,” said Daniel Trum and Dean Turner, strategists at UBS Wealth Management.
The British currency rose as much 0.8 per cent to above US$1.2350, its highest since July 29 and building on Wednesday’s 1.4 per cent surge, its biggest one-day jump since March.
Taking the gains over the last two sessions, the pound is on track for its biggest two-day rise in 10 months as some hedge funds are forced to unwind some of their extreme bearish bets.
The pound has been shunned in recent weeks as concerns grew that Britain would crash out of the EU without a deal on the scheduled date of Oct. 31. On Monday, it fell to below US$1.20, a near-three-year low.
UBS analysts said that, if Brexit were delayed until January, and an election were set for a date after Oct. 31, the pound could rise as high as US$1.30, a four-month high.
“A delay for both Brexit and general election will continue to send the pound higher,” said Neil Jones, head of hedge-fund currency sales at Mizuho Bank.
The rally reverberated through the derivative markets as well. Two-month implied volatility gauges for pound options, which cover the scheduled Oct. 31 Brexit date, fell.
The drop in expected price swings for the pound indicated markets were unwinding extreme short-term negative bets.
Two-month implied volatility fell below 13 vol after rising to a three-year high of nearly 16 vol earlier this week.
Despite the rebound, the British currency remained more than 8 per cent below its March highs of nearly US$1.34, with many citing the uncertainty that an election would bring, whenever it is held.
“With the results from any election so hard to forecast and the difficulty of still fixing on a deal, we think further pound rallies are likely to be limited until we have clarity on outcomes,” said John Marley, a senior FX consultant at FX risk management specialist, SmartCurrencyBusiness.
Against the euro, the British currency gained 0.3 per cent to 89.74 pence. — Reuters
