LONDON (Reuters) - The British pound rallied on Friday as the immediate risks around Brexit receded after the postponement of the departure date and as the dollar suffered a broad selloff, although collapsing volatility signalled a reluctance to bet big.
European Union leaders this week agreed to an up to six-month delay to Brexit, removing the imminent threat of a no-deal exit but also leaving the likelihood of months of political uncertainty in the United Kingdom.
Philip Hammond, the British finance minister, said on Friday it was very likely that the idea of a second Brexit referendum would again be put to parliament at some point, although the government remained opposed to any new plebiscite.
Traders said had provided some support to the pound, given that parliamentary backing for a new referendum raised the possibility that the 2016 referendum vote to leave the EU could be reversed.
MUFG analyst Lee Hardman, however, said Friday’s move higher was largely because of broad dollar weakness as investors moved into riskier assets following data showing a rebound in Chinese exports last month.
The pound remains stuck in a recent trading range, and having strengthened in 2019 Hardman said that without fresh cues on the Brexit outcome the British currency was unlikely to move significantly higher.
“We expect consolidation for the pound. We are likely to continue to see range trading.”
With investors unsure of immediate drivers for the pound, volatility expectations have plummeted.
One-month implied volatility - a gauge of expected price swings - has tumbled to its lowest since January 2018. Three and six-month measures are at similar lows.
Further falls past those January 2018 lows would leave implied volatility back at levels last seen before the 2016 British Brexit referendum.
(Graphic: Sterling volatility, tmsnrt.rs/2VGrts4)
On Friday sterling rose to $1.3130, up 0.6 percent.
Against a rallying euro the pound held its own and was unchanged at 86.24 pence by 1325 GMT.
ING analysts said they expect sterling to fall over the next few months, in part because a Conservative party leadership battle could result in a hardline eurosceptic prime minister, and also because the six-month Brexit delay was too short for the Bank of England to tighten monetary policy.
The “partial clean-up of the GBP short positioning (and some built-up of new speculative longs) since the beginning of the year can also add to the reversal as GBP positioning is no longer meaningfully skewed one way,” the analysts wrote.
The Dutch bank predicts sterling will test levels of 88 pence per euro and $1.27.
Editing by Giles Elgood/Mark Heinrich