October 21, 2019 / 8:43 AM / 22 days ago

Pound holds near $1.3 as Brexit deal vote blocked

LONDON (Reuters) - Sterling traded around $1.30 on Monday, a 5-1/2-month high, unmoved by House of Commons Speaker John Bercow’s decision not to immediately allow a vote on the Brexit withdrawal deal as investors thought a no-deal exit from the EU would be averted.

Investors have been rushing to cover short positions as the risk of a no-deal Brexit ebbed, with the most likely outcome now expected to be a three-month extension to the Oct. 31 deadline to leave the European Union.

The pound slipped briefly after Bercow’s ruling on Monday. He said the same issue had been discussed on Saturday when opponents turned Prime Minister Boris Johnson’s big Brexit day into a humiliation.

Bercow said however, the government could still secure ratification for the deal by Oct. 31 if it had the numbers in parliament.

“It’s not really a surprise. The thinking was that he would probably block it,” said Michael Hewson, chief market strategist at CMC Markets.

“The risk of a no-deal in the short term has diminished and that is why the pound is managing to hold up as well as it has,” Hewson added.

Holding on to the 6% gains chalked up since Oct. 10, the pound was at $1.2984 after Bercow’s statement, having slipped off an earlier high of $1.3012. Against the euro, the pound strengthened 0.3% to 85.89 pence.

Stephen Jen, a macro hedge fund manager at EurizonSLJ expected the pound to trade in the 1.33-1.36 range in coming days.

“Whether it can scale the 1.40 threshold will depend on the discussions on the future arrangement with the EU and the UK’s own growth strategy,” Jen added.

Parliament will vote in the second reading on legislation known as the Withdrawal Agreement Bill on Tuesday, after which amendments can be proposed.

Graphic: Sterling short positions - here

“FOMO”

The pound opened 0.5% weaker on Monday but recouped losses as comments from Northern Ireland’s Democratic Unionist Party were interpreted as meaning it could support Johnson’s Brexit deal.

But while the DUP comments may have been a catalyst, analysts said the market was being driven by investors scrambling to buy the currency before it rallied further, especially those who were “short” the currency.

“There is a FOMO in the market, fear of missing out, so everyone wants to be on the right side of the trade. We know sterling will appreciate if we get a deal and no deal is now unlikely ... so that’s slightly skewing the bets,” said Morten Lund, strategist at Nordea Markets.

Broader market sentiment mirrored that view as gauges for implied sterling volatility in different tenures eased.

Overnight volatility slipped to 17.4 vol from a three-year high of 30.3 vol on Saturday. One-month implied volatility, which encompasses the still-relevant Oct. 31 Brexit deadline, also declined.

Moreover, leveraged funds had fewer sterling short positions than in August, although volumes increased to $5.53 billion in the week to Oct. 15, CFTC data showed.

Graphic: 1.30 - here

The optimism was also reflected in stock and bond markets. Mid-cap London-listed shares rose 0.4%, while yields on British government bonds rose 5 to 7 basis points across the curve.

Uncertainty still lingers, however. The government has reiterated that Britain will leave the EU on Oct 31.

FILE PHOTO: British sterling banknotes stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger/File Photo

“I think markets are really trying to feel their way through this, but you don’t want to be caught short the pound at this point,” said Ned Rumpeltin, European head of currency strategy at TD Securities.

Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

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

Reporting by Olga Cotaga; Additional reporting by Elizabeth Howcroft, Simon Jessop; editing by Sujata Rao, Larry King, Kirsten Donovan

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