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Sterling fell after U.K. politicians failed to deliver the decisive Brexit vote that had been promised at the weekend.
The decline brought to a halt a four-day winning streak that was fueled by speculation Prime Minister Boris Johnson could win parliamentary backing for his divorce deal. But strategists say the drop may prove short-lived.
“Investors will have to balance the disappointment of a further delay with the increasing likelihood of eventual passage,” said Ned Rumpeltin, European head of currency strategy at Toronto-Dominion Bank. “The tail risk of an accidental no-deal crash out has also ratcheted down.”
Analysts remain bullish even as a verdict on Johnson’s new divorce deal was deferred. Instead, lawmakers supported an amendment put forward by former Conservative minister Oliver Letwin which requires the House of Commons to pass all necessary Brexit legislation before holding a formal vote on the Withdrawal Agreement. That meant the prime minister was legally bound to ask the EU for another extension to negotiations.
With the Times of London reporting that the EU may grant a three-month delay if Johnson is unable to secure support for his deal this week, the pound stabilized around $1.2934. The prime minister is set to introduce the legislation needed for an Oct. 31 exit and it’s possible he will garner enough support to push his deal through, according to a Bloomberg analysis.
“Seems like an anti-climactic open for sterling, with investors potentially comforted by the Article 50 extension that the EU seems willing to grant in the case no deal is agreed,” said Valentin Marinov, Credit Agricole’s head of Group-of-10 currency research. “Given that another vote on the Johnson deal could come as soon as Tuesday, investors could use any sterling dips as buying opportunity.”
Marinov is sticking to his view that the pound could reach $1.36 medium term.
European Council President Donald Tusk said he would consult EU leaders on how to react to the U.K.’s request for another extension.
Sterling could move sharply lower if Brussels were to formally reject a later deadline, according to TD’s Rumpeltin. It may lurch lower toward $1.2835 and then further to $1.2750 “if the sense from the EU was one of growing rancor and impatience,” he said.
Still, Rumpeltin’s central view is one where the EU would grant an extension.
And that more bullish slant for sterling is reflected in the views of other strategists too.
“The weekend’s events, if anything, further reduce the risk of disorderly exit,” said Adam Cole, Royal Bank of Canada’s chief currency strategist. A knee-jerk negative sterling reaction may be a buying opportunity, he said.
To contact the reporter on this story: Anooja Debnath in London at [email protected]
To contact the editor responsible for this story: Paul Dobson at [email protected]
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