January 11, 2019 / 10:20 AM / 2 months ago

Sterling struggles as Brexit setbacks hinder PM May before vote

* Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

LONDON, Jan 11 (Reuters) - The pound treaded water on Friday, with the currency pressured by uncertainty over Brexit and the prospect that British Prime Minister Theresa May could soon face a general election.

Two of the biggest donors to the Brexit campaign told Reuters they now believe the project they championed will eventually be abandoned by the government, underlining the uncertainty about what will happen after March, Britain’s scheduled departure date from the European Union.

Data published on Friday showed that Britain’s economy cooled in the three months to November, but the focus remained on May’s efforts to get her Brexit deal through parliament.

A series of setbacks suffered by May in parliament ahead of a key vote on her Brexit deal next week has pushed sterling to a one-week low against the euro.

On Friday it traded down 0.3 percent against the single currency at 90.55 pence before recovering to 90.235 pence. The British currency was little changed against a broadly weaker dollar at $1.2767.

Parliament is due to vote on the agreement on Jan. 15, and May looks set to lose the vote unless she can convince opponents within and outside her party to back her deal.

The run-up to the parliament vote is likely to dominate trading of sterling but the consequences of its outcome for the British currency are far from clear.

“Some of the Brexit scenarios are very bearish for GBP. We’d prefer caution at this stage rather than opting for some lottery ticket on a sharp GBP rally,” said Petr Krpata an FX strategist at ING in London.

If May loses the vote on her Brexit deal and a national election is held that ushers in a Labour Party government and its high-spending policies that would likely weigh on sterling.

But British lawmakers have demanded a quick plan B if May loses the vote and that could reduce the chances Britain will leave the European Union on March 29 without a deal on their future relationship.

Despite the uncertainty, the risk that sterling will fall against the dollar is deemed the lowest in over four months, according to one-month risk reversals, a gauge of market positioning.

“I am looking for a higher sterling. This week’s politics are moving us away from a hard brexit,” said Neil Jones, head of hedge fund foreign exchange sales at Mizuho.

Expectations for sterling price swings have also diminished in the last few sessions, with investors now expecting less implied volatility over a one-month period.

The last time a vote on May’s Brexit deal was scheduled, in mid-November, the measure of sterling volatility climbed to a two-year high. The vote was eventually postponed and is now set for Jan. 15.

“A no-deal Brexit has become less likely. But anyone who tries to make a prediction of what the Brexit outcome will be is only deluding themselves,” said Sarah Hewin, chief Europe economist at Standard Chartered.

“Both extremes look live – the chance of a no-Brexit and the chance of a no-deal Brexit.” (Reporting by Tom Finn; Editing by Angus MacSwan)

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