LONDON: The British pound weakened on Monday as traders braced for a clash between the government and lawmakers opposed to Prime Minister Boris Johnson’s Brexit plans as parliament returns this week from its summer recess.
Parliament returns on Tuesday and opposition lawmakers are expected to propose legislation to force the government to postpone Brexit.
Johnson has threatened to purge any lawmaker in his party who votes against the government on Brexit, a senior source in the office responsible for Conservative party enforcement said.
Sterling traders are preparing for the battle for Brexit to enter the endgame this week when opposition MPs, and possible ruling party rebels, seek to either change the law, or the government, in their drive to block what they say would be an economically damaging no-deal Brexit on Oct 31.
After plunging towards US$1.20 in early August following Johnson’s appointment and worries Britain was set to leave the European Union without a deal, the pound has bounced around the US$1.22 mark in recent weeks.
On top of developments in parliament, sterling remains vulnerable to news around the UK’s efforts to get the EU to reopen the Brexit withdrawal agreement.
Sterling dropped more than 0.5% to as low as US$1.2094 in early London trading – a two-week low – while against the euro it declined 0.4% to 90.70 pence.
A widely-watched survey on Monday showed that British manufacturing contracted last month at the fastest rate in seven years, adding to worries about a significant downturn in the UK economy.
The August Purchasing Managers Index for Britain’s manufacturing sector came in at 47.4, against a forecast of 48.4 in a Reuters poll of economists.
An already-weak pound was little moved as Brexit dominated trading.
“The Prime Minister is willing to resist all attempts to prevent a no-deal Brexit and call an election. The House (of Commons) will try and stop him. GBP shorts are big, but a bit smaller than they were. A no-deal Brexit is partly, but not wholly priced in,” said Kit Juckes, currency strategist at Societe Generale.
According to the latest positioning data, speculators cut their short positions against the pound but – at US$6.8 billion – the size of the bet against sterling remains near its biggest since 2017.
Traders are expecting much more volatility in sterling in the coming months, with implied volatility gauges at or near their 2019 highs.
Last week, Johnson’s government announced parliament would be suspended for around a month in what critics called an attempt to squeeze the time lawmakers had left to try and stop a no-deal Brexit.
“The pound will initially attempt to add to its recent gains if opposition MPs are successful in passing legislation in the week ahead. However, those gains could prove short-lived as it remains unclear how the government will respond to the request from parliament,” MUFG analysts said in a note.