LONDON (Reuters) - Sterling was steady on Wednesday, lingering below a six-week high against the dollar reached on Monday, as investors assessed the chances Prime Minister Boris Johnson can strike a Brexit deal with the European Union before Oct. 31.
The probability of a no-deal Brexit was still very much a concern for traders, given that Johnson stood firm on taking Britain out of the EU by the end of next month.
But the British parliament approved legislation which forces Johnson to request a deadline extension from Brussels if he cannot agree on a deal with the EU by mid-October.
Investors, calculating that the risk of no-deal Brexit is receding after the law passed, have pushed sterling from under $1.20, the three-year low it reached early last week, to as high as $1.2385 on Monday.
“Versus a year ago, no-deal risks are higher, but on balance no-deal risks over the last week or so have reduced,” said Justin Onuekwusi, fund manager at Legal & General.
By 1445 GMT on Wednesday, sterling was at $1.2347, down 0.1% . Against the euro, however, the pound gained 0.3% to 0.8907 .
The pound has also been supported this week by better-than-expected economic data, which confounded earlier expectations that the U.K. would fall into recession this quarter.
ING analysts said the pound had rebounded as traders betting against it were forced to close their positions.
“With the short squeeze in sterling under way, we have observed a general reduction in various sterling risk premia measures over the past week,” they wrote.
Volatility gauges suggest investors think the next “stress period” for the pound will come in late November and early December, the ING analysts said.
Sterling implied volatility embedded in two-month option prices which encapsulate the Brexit October deadline, has fallen to 9.35 vols from 15.45 vols reached at the beginning of September, its highest since the Brexit referendum in June 2016.
“With the U.K. Parliament suspended for the next five weeks, the pound may enjoy some more calm today / this week, but we expect pressure on sterling to return once the early elections are announced,” the ING analysts said.
Reporting by Tommy Wilkes, editing by Larry King and Dan Grebler