Sterling pushed above $1.23 on Thursday, notching up more than three per cent of gains against the dollar from the start of the week as investors cheered the blows to Boris Johnson’s attempts to push through a no-deal Brexit.
The pound hit the day’s high at $1.2332 in European trading hours after Conservative MP and brother of the UK prime minister Jo Johnson quit his party following last night’s vote in parliament that aims to thwart Boris Johnson’s promise to leave the EU on October 31 “do or die.”
The strong gains have made the pound the best performing currency over the last two days. The currency’s bounce comes after the change of tone from the negative start to the week when the risks of a no-deal Brexit hit as high as 40 per cent, based on options market pricing. This pushed sterling to its lowest against the dollar since a flash crash in 2016 and to briefly trade below $1.20.
The chaotic political scenes in the UK upended normal trading behaviours, when the pound hit the day’s high after Mr Johnson’s government lost its working majority. Since then, sterling inched higher with every setback suffered by the government which is calling for an early general election. Labour leader Jeremy Corbyn refused to support a general election in Parliament, as his party claimed that Mr Johnson’s election call was just a ploy to ensure that the UK leaves the EU in October.
Investors are also seemingly warming the possibility of Labour leader Jeremy Corbyn becoming prime minister.
Daniel Trum, a strategist at UBS Wealth Management said if Brexit is delayed until January 2020 to allow time for an early election, the pound could be set for significant gains.
“Sterling could rally above $1.30. A deal could even bring it to $1.35,” said Mr Trum.
But investors remain cautious about the pound’s prospects as British politics continue to present surprises and traders are bracing for unpredictable price swings as well as elevated volatility. The House of Lords will debate a bill that aims to extend the October deadline and a decision is expected by Friday.
Fritz Louw, a currency analyst at Japanese bank MUFG said the bill passing as expected could provide “modest near-term” support for the pound, but cautioned that the delay will lead to continued uncertainty.
“At best [the bill passing] may only just push out the timeline for no-deal Brexit risk a little, rather than significantly diminishes it overall,” said Mr Louw.
