Pound traders face the risk of yet another vote on Theresa May’s Brexit plan next week, with the prospect of no-deal continuing to hang over the currency.
Sterling dodged a bullet as the European Union extended the Brexit deadline by two weeks to April 12, or to May 22 if the prime minister’s deal passes Parliament at a third attempt. The last-minute reprieve still doesn’t remove the threat of Britain crashing out of the EU and the pound tumbling for Goldman Sachs Group Inc.
Sterling investors have woken up to the risk of a crash exit, with sentiment over one month the most bearish since the aftermath of the referendum to leave the bloc in 2016. Goldman has revised up the chances of no-deal from 5 per cent to 15 per cent, while some strategists see it as high as 50 per cent.
“By postponing Brexit day by at least a fortnight, the UK and the EU have kept all options in play for now,” said Goldman strategists including Alain Durre. “At this stage, it is difficult to tell whether the Prime Minister’s Brexit deal will be able to command a majority next week.”
The pound has whipsawed this month yet is still the best-performing major currency in 2019. It remains around 12 per cent lower since Britons voted to leave the EU. The continued uncertainty is leading more firms to trigger no-deal plans and bond investors to pile into havens including UK gilts.
Monday will see the latest attempt by lawmakers to wrestle more control over the Brexit process, via an amendment making time for so-called indicative votes on the best way forward. If the amendment passes, these votes would be held Wednesday. The government plans to put the exit deal to Parliament on Tuesday or Wednesday.
EU leaders told May she can either get her plan through the House of Commons or decide whether to pursue no deal, a long extension or to revoke Britain’s exit. That leaves pound investors still grappling with a myriad of scenarios. A gauge of volatility over one week is holding near the highest since 2016, while one-month risk reversals — a measure of options positioning and sentiment — is the most in favour of pound puts since June 2016.
“The risk of a disorderly Brexit has reared its ugly head again and may linger before the third meaningful vote on PM May’s ill-fated Brexit deal,” said Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA. “While there is still hope that reason will prevail and the threat of a no-deal Brexit may sway the MPs’ vote in favour of the proposal, we see a significant risk of rejection.”