Sterling rallies as UK lawmakers take steps to block no-deal Brexit

LONDON (Reuters) - Sterling jumped on Wednesday, posting its best day against the dollar in over five months, as investors grew more optimistic after British lawmakers took steps in an attempt to block a no-deal Brexit.

FILE PHOTO: UK pound coins plunge into water coloured with the European Union flag colours in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic

Lawmakers who defeated Prime Minister Boris Johnson’s government late on Tuesday are hoping to pass a bill that seeks to stop Britain from leaving the European Union on Oct. 31 without transitional arrangements.

Johnson’s demand for an Oct. 15 snap election was also defeated.

“This certainly puts no-deal in its place: UK not doing it,” said Juan Perez, senior currency trader at Tempus Inc in Washington. “Sterling should see tremendous recovery.”

The moves put sterling further off the three-year low of $1.1959 hit on Tuesday.

Bank of England Governor Mark Carney said on Wednesday that a worst-case no-deal Brexit would inflict less severe damage on Britain’s economy than previously thought because of preparations undertaken since the end of last year.

Sterling GBP=D3 ended up 1.4% at $1.2253, a shade below its one-week high of $1.2258, as it was initially lifted by a 0.6% dollar pullback sparked by Tuesday's dismal U.S. manufacturing data..

Against the euro, the pound finished 0.85% higher at 90.03 pence EURGBP=D3, a level not seen since July 29.

Sterling volatility gauges also eased, with two-month implied vol, a contract capturing the Oct. 31 Brexit deadline, falling from three-year highs reached on Tuesday GBP2MO=FN.

GRAPHIC: Sterling vol down -

The appetite for sterling was not dented even by a weaker-than-expected services purchasing managers’ (PMI) survey, though the figures came as a warning that Britain’s economy is in danger of entering its first recession since the financial crisis.

The PMI fell to 50.6 in August, barely above the barrier between growth and contraction, from 51.4 in July. A Reuters poll had forecast a decrease to 51.

More big price swings are likely as the battle over Brexit enters another crucial phase. Possible outcomes range from a turbulent no-deal exit to abandoning the whole endeavor.

The British currency is the second worst performing major currency year-to-date, according to Refinitiv data. Except for lows plumbed during the October 2016 “flash crash,” Tuesday’s fall took sterling toward levels not seen since 1985.

GRAPHIC: Sterling vs. the U.S. dollar since 1960 -

Reporting by Olga Cotaga in London; Additional reporting by Sujata Rao in London and Richard Leong in New York; Editing by David Gregorio and Leslie Adler