Sterling

Sterling recovered on Wednesday after declines triggered by the UK parliament’s rejection of amendments to delay Brexit, as investors bet the government would still avoid exiting the European Union without an agreed divorce deal in place.

Growing expectations that Britain can avoid a no-deal Brexit have fuelled a 3 percent rally in the pound this month against the dollar and the euro.

But sterling fell 0.7 percent on Tuesday after lawmakers voted to demand Prime Minister Theresa May renegotiate the terms of Britain’s exit and they rejected an amendment that would have postponed the scheduled departure date of March 29.

However, lawmakers also approved a non-binding amendment that said Britain should seek to avoid a no-deal Brexit, and analysts said the risk of such a disruptive exit had risen only slightly. Goldman Sachs, for example, put the chances at 15 percent compared with an earlier 10 percent forecast.

By 1635 GMT, sterling was flat at $1.3070, roughly a cent below where it traded before Tuesday’s vote.

Against the euro, the pound rose around 0.15 percent to 87.4 pence.

Traders are trying to figure out whether May’s Conservative Party rallying around her has increased the chances of her securing concessions from the EU – which would likely boost sterling – or has pushed Britain toward further deadlock and uncertainty.

The currency had gained before the vote on expectations that parliament would approve a divorce deal on time or would extend the Article 50 deadline of March 29. Analysts said not much had changed on that front.

“The market is still giving a very low probability to a no-deal,” said Sarah Hewin, chief Europe economist at Standard Chartered, which still sees chances of hard Brexit at 20 percent. “The sense I get is people feel that is a negligible prospect.

“But chances of an extension to Article 50 are rising. That probability is looking more likely than not with each day that goes by.”

Analysts at BNP Paribas agreed, advising clients to stay long sterling and seeing a Brexit delay as “inevitable”.

The renewed uncertainty caused money markets to reduce expectations that the Bank of England would raise interest rates in 2019. The probability is now only 52 percent, compared with 64 percent on Tuesday before the vote.

“The market is taking the view that as long as Brexit uncertainty persists it’s going to be difficult for the BoE to raise rates. As we are now in the realm of extending Article 50, it means uncertainty is also extended and that’s the rationale behind the pricing,” Hewin said.

Source: UK Reuters

Sterling is likely to gain more than 8 percent this year — assuming Britain and the European Union part ways amicably, according to a Reuters poll of foreign exchange strategists.

The pound has largely been ignoring economic data, instead swinging wildly on any snippet of news about Britain’s departure from the EU in less than three months.

While it has showed some strength to start the year, that is largely down to dollar weakness. Its performance against the euro has been more muted.

With only a short time left, the Brexit outcome remains uncertain. British lawmakers are expected to vote next week against a Brexit agreement Prime Minister Theresa May struck with the EU in November.

May’s government suffered a defeat in parliament on Tuesday when lawmakers who oppose leaving the EU without an accord won a vote creating a new obstacle to a no-deal Brexit.

On Wednesday, May failed to win over the Northern Irish party which props up her government and then lost a vote which means she has a shorter period of time to come up with an alternative plan if she is beaten next week.

A November Reuters poll said sterling would rise around 5.5 percent in the event of an amicable split but fall over 6 percent if there is a hard Brexit.

Still, there is only a median 25 percent probability of a disorderly Brexit, a Reuters poll predicted last month. Almost 90 percent of economists surveyed expect a free-trade deal between the two sides. [ECILT/GB]

Those economists also mostly expect the Bank of England to raise interest rates by 25 basis points to 1.0 percent as soon as April, which would support the currency.

Ongoing doubts about the health of the world’s two biggest economies – the U.S. and China – as well as a trade war between them that’s hurting growth have raised questions about how high U.S. interest rates will go this year.

The dollar’s rally is largely over, according to about two-thirds of the currency strategists polled by Reuters. They said dialling back rate hike expectations has diminished the dollar’s strength. [EUR/POLL]

On Wednesday, the pound rose towards $1.28 after reports May was attempting to win over the Northern Irish Democratic Unionist Party in next week’s crucial vote but dropped when she failed.

Sterling also rallied on Tuesday following reports British and European officials were discussing the possibility of extending the formal exit process amid fears a Brexit deal will not be approved by March 29.

In a month, sterling will be little moved from Wednesday’s levels, trading at $1.27. When Britain and the EU part ways it will have strengthened to $1.30. By mid-year it will have climbed to $1.32 and at year-end it will be over 8 percent higher at $1.38.

“Ultimately, we assume the removal of the current Brexit uncertainty, which will prompt a period of pound appreciation as the year unfolds,” noted analysts at MUFG, who expect a sterling rally to $1.43 by year end.

However, that 12-month median forecast is still lower than the $1.50 sterling was hovering around before the June 2016 Brexit referendum. Only three of 66 analysts with 12-month forecasts expected it to strengthen past that.

Highlighting the uncertainty around the pound’s future, the 12-month forecast ranged from $1.22 to $1.59.

Against the euro, the pound will make modest gains. On Wednesday, a euro was worth about 90.0 pence. In six months, forecasts are for 87.0p and in a year 86.5p.

Source: UK Reuters