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Pound's rocky ride set to get worse

London

AT ONE point on Friday, the pound swung between gains and a two-week low as traders parsed contrasting headlines about the progress of Brexit.

Those swings may be dwarfed next week as UK Prime Minister Theresa May puts her divorce deal to a vote yet again in Parliament. If she can't gain the backing of lawmakers for her plans, she will hold a vote on avoiding no deal and another on extending Article 50's March deadline.

Sterling has sold off over the past week as the mood music on the prospects of reaching a deal with the European Union before Tuesday's vote has soured, with the UK so far failing to get the concessions it wants on the Irish border.

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Market voices on:

"Should next week's votes prove to be insurmountable obstacles to Mrs May's deal, we think the pound may struggle to perform until there is more clarity on the outcome of the Brexit process," said Credit Agricole SA strategists including Valentin Marinov.

The most likely scenario, according to a Bloomberg survey of banks, is that Mrs May's deal fails to pass and Parliament votes in favour of a delay to the process. This could usher in a pound move up to US$1.33, according to the survey. That would add to the currency's gains this year that have made it the best performer among Group-of-10 peers.

Optimism on this outcome could be short-lived depending on the EU's response following any vote to postpone Brexit on Thursday, according to Canadian Imperial Bank of Commerce's head of Group-of-10 strategy Jeremy Stretch.

"Any sterling rallies on Thursday night on a vote to push back Article 50 could be compromised on Friday as the EU comes back with a demand saying this is the price you have to pay for an extension," he said. "Maybe that price will be sufficiently worrisome to make the market reconsider."

Implied volatility in the pound-dollar pair touched the highest since mid-January on Friday, as traders sought to hedge against price swings. Risk reversals, an options gauge of sentiment and positioning, are fairly balanced between pound calls and puts over one week.

The Bloomberg survey found the pound could drop as low as US$1.20 on a vote for no deal or rally to US$1.38 if Mrs May's plan unexpectedly goes through. BLOOMBERG