Pound rallies as likelihood of Brexit delay rises
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The pound continued its sweep higher on Tuesday, gaining more than 1 cent against the dollar to reach its strongest level since October on expectations that the UK will avoid crashing out of the EU without a deal.
The currency extended earlier gains in late London trading to reach $1.3254, up by 1.2 per cent from the start of the day. It also approached its highest level against the euro in nearly two years.
“The pound has taken a pro-remain stance and tends to rally hard when the likelihood of a no-deal Brexit shrinks. There seems to be a lot of reluctance from the currency to accept the reality that Brexit could happen without a deal,” said Jane Foley, head of forex strategy at Rabobank.
The rise in the UK currency came after prime minister Theresa May opened the way for a delay in Britain’s planned departure from the EU if MPs continued to block the exit deal she was negotiating with Brussels. That move came after an announcement by Jeremy Corbyn, the opposition leader, that the Labour party would back a second referendum on Britain’s membership of the EU.
If MPs reject a revised deal in a vote set to take place before March 12, Mrs May will then offer a vote on whether to press ahead with a no-deal Brexit on March 29 or take a “short extension” of the Article 50 divorce process.
“I think the pound could move another leg higher to $1.33 or even $1.34, but for now I think this will be it,” said Vasileios Gkionakis, global head of foreign exchange strategy at Lombard Odier in London.
“Despite the UK parliament being in a circus state, there is a general perception that parties want to avoid a no-deal outcome,” he added.
Analysts said the positive mood in sterling may not last, as investors start to query how long an extension might be, whether the possibility of a second referendum is higher and what that would mean for the divorce process. Citi analysts noted that the chances of a snap election have increased in recent days.
Even after Mrs May confirmed the market’s expectations by pushing back an exit date, the pound is not out of peril. Andreas Koenig, head of global foreign exchange at asset manager Amundi, said investors have grown tired of ups and downs in the exchange rate, and have cut their positions in sterling to avoid exposure to whipsawing moves. That makes the exchange rate even more susceptible to swings, as fewer buyers and sellers trade. Predictability on the next steps remains low, he said.
“The market used to try to forecast the outcome of Brexit but that got very complicated and contingencies kept increasing. Now they’re forecasting step by step, looking at what the next move might be — not necessarily the outcome,” said Mr Koenig.
This is likely to keep investors wary of placing big bets on the pound, especially as a no-deal Brexit is still a possibility.
“The . . . market narrative has shifted to a ‘Brexit delay’ as being the most likely scenario, and this is an easy thesis for many to digest,” said Stephen Gallo, head of European forex strategy at BMO Capital Markets.
Additional reporting by Michael Hunter in London
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