LONDON (Reuters) - Sterling leapt to a 10-week high on Wednesday after Britain’s opposition Labour Party said it would back an attempt by lawmakers to prevent a disorderly no-deal Brexit.
The United Kingdom is due to leave the European Union on March 29 but has no approved deal on how the divorce will take place.
Still, the pound is rallying as investors bet that a no-deal Brexit - the worst case scenario for the currency - can be avoided if parliament exerts greater control over the process.
“Overall the view is parliament doesn’t want a hard Brexit and nor does the EU... and if that’s the case I don’t see how it can happen,” said Justin Onuekwusi, a fund manager at Legal & General Investment Management.
“We are neutral on sterling as you have to be quite nimble,” he added.
The risk that sterling will fall against the dollar is at its lowest in more than four months, according to one-month risk reversals, a gauge of market positioning.
In addition, expectations for sterling price swings have diminished in recent sessions.
(Graphic: Sterling volatility link: tmsnrt.rs/2HqWTA0).
But sterling is unlikely to continue rallying simply on the basis of a delayed Brexit, said Thu Lan Nguyen, an FX strategist at Commerzbank in Frankfurt.
“Delaying is far from finding a solution... hard-line Brexiteers would never tolerate an indefinite delay of the EU exit,” she said.
Sterling strengthened 0.9 percent against the dollar to $1.3079. It also rose for a third consecutive day versus the euro gaining 0.8 percent to 87.33 pence, it highest since Nov. 14.
The pound was lifted on Tuesday by strong employment data which suggested Britain’s labour market remained robust despite an economic slowdown ahead of Brexit.
“Downside risks remain. If the UK were to leave the EU without a deal we would expect the pound to trade as low as $1.15 against the dollar and to reach parity with the euro,” said Dean Turner, UK Economist at UBS Wealth Management.
If lawmakers back an amendment by lawmaker Yvette Cooper in a vote scheduled next Tuesday that could force Theresa May to ask the EU to delay Britain’s exit from the bloc on March 29.
That would need to be approved by Brussels which could be reluctant to extend the period of uncertainty but has said it is open to a delay in certain circumstances.
Foreign exchange strategists polled by Reuters last week saw the pound gaining more than 8 percent against the U.S. dollar this year - assuming Britain and the EU part ways amicably.
Additional reporting by Sujata Rao; Editing by Andrew Heavens and Jon Boyle