February 26, 2019 / 7:48 AM / in 3 months

Sterling hits 21-month high on bets Britain can avoid no-deal Brexit

LONDON (Reuters) - Britain’s pound vaulted to a 21-month high against the euro on Tuesday after Prime Minister Theresa May offered lawmakers the chance to vote on delaying Brexit.

Pound coins are seen in this photo illustration taken in Manchester, Britain September 6, 2017. REUTERS/Phil Noble/Illustration

By opening up the possibility of avoiding a chaotic no-deal departure from the EU - the worst-case scenario for sterling - May’s proposal sent the currency surging.

It jumped 1.4 percent against the dollar to a five-month high of $1.3284 and was headed for its biggest daily gain versus the euro in nearly two years.

Speaking to parliament, May told lawmakers they could vote on March 14 on a motion requesting a “short, limited extension” to the scheduled March 29 departure date if, on March 12, they rejected the Brexit deal she reached with Brussels.

“For markets, the risk of a no-deal Brexit was already slim; now it’s almost vanished,” said Lee Hardman, a currency analyst at MUFG.

“There may be further gains for the pound because this increases the likelihood of May’s Brexit deal being accepted by pro-Brexit politicians who want to avoid delaying the process.”

May’s proposal appeared to take the sting out of votes in parliament on Wednesday on the Brexit process and that also helped the pound, analysts said.

Deutsche Bank said it now saw a 10 percent chance of a no-deal happening versus its previous estimate of 15 percent.

Investors are focused on whether May can secure any concessions from Brussels in the next two weeks and if lawmakers who oppose May’s deal start to signal a willingness to back it.

May’s offer comes after opposition leader Jeremy Corbyn said on Monday his Labour Party would back a second Brexit referendum.

Some analysts cautioned that the path through Brexit remains complicated and fraught.

“An extension of the Article 50 (departure) deadline could still result in a no-deal outcome,” said Sarah Hewin, chief Europe economist at Standard Chartered.

Others say a short delay on Brexit negotiations is already priced in to the pound and a sustained moved higher in the currency is unlikely.

“We’ve had a tick-up in the pound but the market has front-run these developments before, only to be disappointed,” said Kallum Pickering, UK economist at Berenberg.

Sterling implied vol falls: tmsnrt.rs/2EyVsMB

The optimism in spot markets has yet to ripple over to derivatives, with one-month implied volatility gauges on the pound, a market indicator for future expected swings, edging lower but within striking distance of a six-week high.

One-week implied volatility remains elevated due to the uncertainty over the Brexit amendment votes on Wednesday .

Risk reversals painted a slightly bullish picture with one-month gauges creeping higher in overnight trading.

A large buildup of options between $1.34 and $1.35 indicate that investors reckon the rally could go a bit higher but may not last beyond those levels

PM tempers GBP surge: tmsnrt.rs/2BSFTOb

Additional reporting by Sujata Rao and Richard Pace; Editing by Janet Lawrence and John Stonestreet

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