Investors braced for sterling volatility

Investors are braced for wild rides in sterling, which is expected to remain volatile ahead of a crucial period in Westminster that will determine whether the UK leaves the EU with or without a deal this month or if Brexit is pushed back to January.

The pound finished last week on a positive note, trading nearly as high as $1.30 against the dollar, rallying sharply after EU and UK leaders reached a new Brexit deal, ahead of Saturday’s House of Commons vote.

But that optimism is set to be tested this week after the UK parliament delayed the key vote, leaving investors “none the wiser” about the outcome. The key questions for currency traders are whether Boris Johnson has a majority to get his deal approved this week and if the EU will extend the October 31 Brexit deadline.

David Page, Senior Economist at AXA Investment Managers, said MPs had dashed investors’ hopes that this weekend would bring a resolution.

“There is no clarity as to whether parliament will support a new deal, nor whether the EU will grant an extension . . . or for how long,” he said.

Paul Dales, chief UK economist at research company Capital Economics, said the market had been left “none the wiser whether there is a majority in parliament for the latest Brexit deal.”

In a note on Sunday, Barclays analysts warned: “The Brexit calculus remains extremely complex, and investors should brace themselves for sterling volatility in the coming days.”

After rallying sharply on Thursday, trading at its strongest for five months, sterling slipped slightly ahead of the Saturday sitting amid doubts the UK government would get the support needed for the deal. Over the weekend an analysis of the vote suggests that Mr Johnson could have a majority of five.

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Currency traders have not yet had chance to react to Saturday’s vote and are waiting for the markets to open in New Zealand late Sunday UK time. Several large banks have called in extra staff to help navigate trading over concerns that the lack of liquidity could exacerbate price swings.

At the end of last week, traders signalled uncertainty about the pound’s future exchange rate as implied volatility — the measure of expectations about large price swings — spiked to its highest since 2016.

Sterling’s rally in recent weeks could also stall as investors take profit and “as the market expects further time wasting”, said Jordan Rochester, Nomura currency analyst.

Oliver Harvey, head of UK macro and Brexit research at Deutsche Bank, argued the pound’s prospects would remain positive at the start of the week as voting on the deal could happen as soon as Tuesday. However, he added: “It’s probably not wise to completely rule anything out.”

Mr Harvey said investors could take “a bit more comfort from the chances of a no-deal on October 31 having diminished further”.

Barclays analysts noted that failure to secure parliamentary approval on Tuesday could weigh on the pound, “given the significant market premium attached to a deal,” although losses should be limited if an extension is granted and a second referendum remains an option.

But as all options are on the table still, the pound remains vulnerable to large and unexpected swings in the exchange rate. Daniel Trum, a currency strategist at UBS Global Wealth Management said a no-deal exit could see the pound drop to $1.12, but if MPs agree a deal the pound could rocket to $1.35.

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“Risks are rising that MPs find a way to kick the can down the road . . . again. Eureka remains rather elusive,” Mr Rochester added.


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