LONDON (Reuters) - Sterling steadied below $1.29 on Wednesday after Britain’s parliament accepted a Brexit withdrawal deal in principle but rejected the government’s tight timetable to legislate on the agreement before a Oct. 31 deadline.
Prime Minister Boris Johnson told parliament that if it defeated him on the timetable and forced a delay until January he would abandon his attempt to get lawmakers to ratify the deal and instead seek an election before Christmas. That led investors to price in elections and another Brexit delay.
“The likelihood of a Brexit deal has risen, but crucially the outcome that investors feared the most, a no-deal Brexit that could have pulled sterling down to $1.12 - seems less likely now than at any time in the last few months,” said Mark Haefele, chief investment officer at UBS Global Wealth Management in a note to clients.
“We retain our overweight position in sterling versus the U.S. dollar in our FX strategy.”
Haefele added that if the likelihood of a general election grows, sterling would settle in a $1.26-1.32 range, and if a deal for Britain to exit the European Union eventually passes, the pound would rally to $1.35.
Goldman Sachs said that it still expected the UK parliament to approve Britain’s Withdrawal Agreement with the EU, and that there would be a “technical extension” to Brexit of three or four weeks beyond the Oct. 31 deadline.
EU leaders are considering Britain’s request for a Brexit delay, and are expected to grant a three-month extension to the Oct. 31 deadline for its departure.
By afternoon in London, sterling was 0.15% higher to the dollar at $1.2889 after falling 0.62% on Tuesday GBP=D3. It was 0.1% higher to the euro, last trading at 86.26 pence EURGBP=D3.
Two-week implied volatility on sterling - a contract that captures the Oct. 31 deadline - continued to fall, indicating there is little fear of a no-deal Brexit around that date. It was trading around 9.3%, the lowest since Oct. 10 GBP2WO=FN.
However, the renewed uncertainty, especially around possible elections, boosted British government bonds, pushing 10-year yields as much as 5 basis points lower to the lowest since Oct. 16 GB10YT=RR.
Nomura currency strategist Jordan Rochester sees the pound heading lower to around $1.27 on any election announcement.
“If an election is called I do think the pound will go lower, because elections lead to uncertainty and uncertainty leads to a higher premium into UK investments,” he said.
“Even though it’s unlikely, you have to price in the risk of (opposition Labour leader) Jeremy Corbyn elected (to) government or a Brexit Party involvement in the next government.”
RBC analysts said that if the EU granted Britain an extension, as seems likely, the pound would reverse the most recent losses. But they added: “If we are heading for an early election, expect further, but limited, downside.”
Reporting by Elizabeth Howcroft, Julien Ponthus and Ritvik Carvalho; Editing by Mark Heinrich