Markets

Sterling gains ground as Johnson suffers defeats

Currency’s bounce comes after negative start to week

Britain’s Prime Minister Boris Johnson sits as results of the vote are announced during a debate in the House of Commons. Mr Johnson lost a series of vote this evening including a vote for an early election. Photograph: Jessica Taylor/UK Parliament/EPA

Thu Sep 5 2019 - 16:32

Sterling rose above $1.23 (€1.12)on Thursday, notching up more than 3 per cent of gains against the dollar from the start of the week as investors cheered repeated blows to Boris Johnson's attempts to push through a no-deal Brexit.

The pound hit a day’s high at $1.2332 in European trading hours after Conservative MP and brother of the UK prime minister Jo Johnson quit his party, in the wake of Wednesday night’s vote in parliament that aims to thwart the prime minister’s promise to leave the EU on October 31st “do or die”.

The gains have made the pound the best performing major currency against the US dollar over the past two days.

The currency’s bounce comes after a negative start to the week when the risks of the UK leaving the EU with no deal rose as high as 40 per cent, based on prices in the options market. This thrust sterling to its lowest against the dollar since a flash crash in 2016 and to trade briefly below $1.20.

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Election

Since then, sterling has inched higher with every setback suffered by the government, which is calling for an early general election. Labour leader Jeremy Corbyn refused to support a general election in parliament, as his party claimed that the prime minister’s call for a poll was just a ploy to ensure that the UK leaves the EU in October.

Investors seem to be warming to the possibility of Labour leader Jeremy Corbyn becoming prime minister.

Daniel Trum, a strategist at UBS Wealth Management, said, if Brexit is delayed until January, 2020 to allow time for an early election, the pound could be set for significant gains.

“Sterling could rally above $1.30. A deal could even bring it to $1.35,” he said.

But investors remain cautious about the pound’s prospects as British politics continues to surprise, while traders are bracing themselves for elevated volatility. The House of Lords will debate a bill that aims to extend the October deadline and a decision is expected by Friday.

Fritz Louw, a currency analyst at Japanese bank MUFG, said the bill passing as expected could provide “modest near-term” support for the pound, but cautioned that uncertainty will persist.

Deadline

“At best [the bill passing] may only just push out the timeline for no-deal Brexit risk a little, rather than significantly diminishing it overall,” he said.

The long-term impact of an extension to the deadline is proving to be less of a focus than the immediate next steps that will determine the likelihood of the UK crashing out of the EU.

Citi analysts said that “the choreography over the coming days could have a significant impact on the final result”, as it will determine if an extension and a subsequent general election take place or if a no-deal Brexit remains on the table.

Petr Krpata, a currency strategist at ING Bank, said the pound’s gains might be temporary amid the political turmoil, which could see the euro strengthen to £0.95 while sterling could weaken to $1.17 in the next three months.

“We see yet more downside risks to the pound,” Mr Krpata said. – Copyright The Financial Times Limited 2019

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