Sterling underwhelmed as PM May offers to quit if her Brexit deal passes

FILE PHOTO: Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester
FILE PHOTO: Pound Sterling notes and change are seen inside a cash resgister, Septem,ber 21, 2018. REUTERS/Phil Noble/File Photo

March 27, 2019

By Tom Finn and Saikat Chatterjee

LONDON (Reuters) – The pound inched up on Wednesday after British Prime Minister Theresa May said she would step down if lawmakers vote in favor of her twice-defeated EU divorce deal.

May’s last-ditch attempt to persuade rebels in her Conservative Party to back her lifted the pound slightly but uncertainty about how, or even if, Brexit will proceed kept investors wary.

Britain’s parliament are trying to find an alternative to May’s Brexit deal and at 1900 GMT lawmakers will take part in a series of indicative votes on how to break the impasse.

Eight options range from leaving abruptly with no deal to revoking the divorce papers or holding a new referendum.

With British politics at fever pitch traders are struggling to navigate the blizzard of headlines. The pound is volatile but remains around the same levels it traded at in late January.

Sterling on Wednesday traded in a narrow range reflecting suspicion in the market about the parliamentary votes yielding a decisive conclusion.

There is no guarantee the so-called indicative votes will bind the government.

May has admitted she lacks support to put her Brexit withdrawal deal to a third vote and that has kept sterling under pressure.

But with May telling lawmakers on Friday that she would quit before the next phase of Brexit negotiations as the price for getting her deal ratified, some of the most influential Brexit-supporting rebels, such as Jacob Rees-Mogg, could back her deal.

“I think chances of May’s deal passing are higher than the market is expecting at the moment,” said Justin Onuekwusi, a portfolio manager at Legal and General Investment Management based in London.

The pound rose 0.25 percent to a day’s high of $1.3245 in a broadly quiet session. Against the euro, it strengthened 0.3 percent to 85 pence.

As the United Kingdom’s three-year Brexit crisis spins towards its finale, it is still uncertain how, when or even if it will leave the European Union, though May hopes to bring her deal back to parliament later this week.

“The possibility of no outstandingly well-supported option, however, remains, and would potentially obfuscate things still further,” Paul Markham, a portfolio manager at Newton Asset Management wrote in a blog post.

Still, on a weekly basis, the British currency was slightly firmer indicating that the recent events in the Brexit process have been welcomed with some cautious optimism though the risks of more political uncertainty have capped gains.

In a sign of how nervous the currency markets have become, expectations of how much the currency would move in the coming weeks have climbed faster than bets on how volatile the pound will be over a year.

One-month implied volatility in the pound has climbed by a quarter to nearly 13 vol and the spread between the one-month and one-year maturities has widened to its highest level since the British referendum vote in June 2016.

(Editing by Alison Williams)

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