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Pound tumbles 1% as investors fear "never-ending limbo" in UK politics
[LONDON] The pound fell 1 per cent on Wednesday against the dollar, ceding gains made the previous day after the Supreme Court's ruling against Prime Minister Boris Johnson, as investors priced many more months of Brexit and general election risk.
Mr Johnson was dealt a blow by the court, which ruled on Tuesday he had unlawfully suspended parliament, sending the pound half a per cent higher.
While the ruling reinforced belief that Britain was unlikely to leave the European Union without a deal by Oct 31, other risks remain, include a split parliament and an election.
"Yesterday there was some misplaced optimism that Johnson would be removed and no-deal would be further away. But what we see today is that the status quo in terms of Brexit has not altered at all," Rabobank strategist Jane Foley said.
"But we still have Johnson in place, the opposition still doesn't want a general election and we are still cornered with respect to Brexit, it's taken a day for that to sink in."
Sterling's weakness was in part also down to a firmer dollar, which has been lifted by bellicose trade war rhetoric from President Donald Trump. Against the greenback, the pound fell to US$1.2380. It weakened 0.6 per cent to the euro to 88.41 pence.
The pound had strengthened to US$1.2504 on Tuesday, not far from a 2-1/2 month high of US$1.2582.
"No-deal risk is still on the table, it's just more pronounced for January now than for October," Mr Foley said.
Implied sterling/dollar volatility, a gauge of expected currency swings and used by many investors in place of trading in the spot market, reflected the risk of continued political turmoil.
The one-month volatility gauge, capturing the EU summit risk, slipped to 10.9 vols, down from the 12.3 vols level hit before Tuesday's ruling, but the decline appears to have stalled.
Also on derivatives markets, risk reversals show a higher implied volatility premium for sterling puts over calls - indicating more bias to sell sterling than to buy - on the two- and three-month contracts that are most likely to capture election risk.
Meanwhile opposition leader Jeremy Corbyn said that once a no-deal Brexit had been averted, it would be appropriate to move a no-confidence motion and then hold a national election.
"The main risk now is that we are in a never-ending limbo," said Kit Juckes, an FX strategist at Societe Generale in London.