LONDON: Sterling fell towards a one-week low on Monday as Prime Minister Theresa May met lawmakers to try and overcome a parliamentary impasse that has raised fears among investors about a disorderly ‘no-deal’ Brexit.
The pound has held on to most of the gains it racked up in January despite there being less than two months until Britain is due to leave the European Union on March 29 and without an agreement governing future ties with the bloc secured.
But concern is mounting about the risk of a no-deal exit and that is showing up in derivative markets which are predicting more currency volatility in the coming days.
Investors have ramped up purchases of two-week options taking into account the dates when British lawmakers meet while two-month risk reversals, a ratio of puts to calls on a currency, have shown increasing signs of caution for the pound.
May aims to get parliament’s approval for a revised deal on Feb. 13. If that fails, parliament will vote on next steps on Feb. 14.
“We’ll probably see another week of intransigence out of Brussels, keeping those No Deal fears on the table,” said Chris Turner, head of foreign exchange strategy at ING in London.
“GBP might stand a better chance of recovery next when those amendments may return for a vote in parliament and a No Deal is formally taken off the table. Cable risks drifting to US$1.2920,” he added.
At 0912 GMT sterling was down 0.2%at US$1.3064 and down 0.1% against the euro at 87.6pence.
On Friday sterling suffered its biggest weekly loss since mid-December partly because of survey data showing uncertainty sweeping British manufacturers ahead of Brexit.
Money markets have cut the probability of a Bank of England December interest rate rise to around 55%, versus 62% a week ago.
Little clarity on rate hikes is expected at the central bank’s policy meeting on Thursday. Rates last went up in August 2018, and the next move likely hinges on how Brexit plays out.