Britain's pound gained as much as 0.7 per cent to 86.14 pence on Friday and while EU leaders gave Theresa May a two-week reprieve to decide how to leave the EU, the strength in the pound was attributed to weakness in the euro following disappointing data from Germany.
Meanwhile, sterling held above $1.31 after recovering overnight. It had plunged towards $1.30 on Thursday in its biggest one-day fall of 2019 as fears mounted that Britain would crash out of the EU on March 29th.
The EU has said Britain can have a short delay to Brexit, as requested by May, but she must first win parliamentary approval for her withdrawal deal that sets out the future relationship between London and its biggest trading partner.
May, however, has already lost two attempts to secure parliamentary support, and with the odds stacked against her for another vote next week the risk of a no-deal Brexit rose sharply.
The EU’s leaders have described the two-week extension as a “last chance” for Britain to secure an orderly Brexit.
"Last night's move by the EUCO (European Commission) has lowered the immediacy of hard Brexit risk next week," Nomura FX strategist Jordan Rochester said. "But no deal can still happen if Theresa May were to wish it, either next week or on 12th April."
The pound was up 0.1 per cent at $1.3117 by just before 9am.
Despite the rise, currency derivative markets signalled a growing caution the outlook for the British currency with one-month risk reversals on the pound versus the euro and the dollar plunging to multi-month highs.
Risk reversals, a gauge of puts to calls, and an indicator of how bearish or bullish are on the outlook of the currency, indicate that short term negative bets on the pound are piling up rapidly despite the broader calm in the spot markets.
One-month risk reversals on the pound versus the euro plunged to their lowest levels since mid-2017. Against the dollar, bearish bets grew to their highest levels since September 2017, according to Refinitiv data.
Referring to Thursday's sudden drop in the pound, MUFG analyst Lee Hardman said "the market's complacency has been tested" and that no-deal fears remained elevated. – Bloomberg
