Sterling jumps on hopes for Brexit breakthrough before vote

LONDON (Reuters) – The pound rallied on Tuesday after British Prime Minister Theresa May secured assurances from the European Union that could break a deadlock over Brexit before a key parliamentary vote on her withdrawal deal.

Sterling added more than three cents from its Monday’s lows at one point, as traders bet that May would eventually secure the support of sceptical colleagues for her agreement, leaving Britain with a more orderly Brexit process.

Against the euro the pound hit a 22-month high.

Investors are braced for a vote at 1900 GMT that could decide how, and if, Britain leaves the EU in less than three weeks.

The uncertainty has seen the pound swing wildly this week and a gauge of the currency’s overnight volatility on Tuesday rose to its highest level since the June 2016 Brexit vote.

Lawmakers had been expected to reject, for a second time, May’s agreement on Tuesday, but the legally binding assurances secured from Brussels meant there was a chance it could pass and that was lifting sterling.

“The pound’s recent declines have been associated with the risk of a disorderly Brexit …. so any alternative outcome, including a rejection of May’s latest deal, could be viewed as sterling supportive,” said LMAX Exchange analyst Joel Kruger.

Britain’s parliament voted down May’s deal by a record 230 votes in January, and sterling is likely to be sensitive to any signs the prime minister can chip away at those losses and convince colleagues to back her in the vote.

UK bookmakers had marked up the probability of the Brexit withdrawal bill passing through parliament to 30 percent from 10 percent late Monday, “which is probably a fair reflection of what is priced into sterling,” said Adam Cole, a currencies strategist at RBC Capital Markets.

Analysts said sterling was strengthening because whether lawmakers vote for or against May’s deal on Tuesday, the likely outcome will diminish the chances of a potentially chaotic no-deal scenario.

Sterling was up half a percent at $1.3208 in early London trading, off the highs of $1.3290 touched overnight.

Against the euro, the pound was up marginally to 85.40 pence.

If May loses Tuesday’s vote, she will face another vote on Wednesday on whether parliament wants to leave the EU without a deal, with a majority expected to refuse the “no-deal” scenario as economically disruptive.

A third vote would then be held on Thursday on whether Britain should request from the EU a limited extension of the March 29 Brexit date.

“Approval of the withdrawal deal would be a huge surprise tonight and could send GBP/USD to $1.35. Elevated levels of short-term volatility suggest that is possible, though perhaps not likely,” ING analysts wrote to clients.

Sterling rises, implied vol surges – tmsnrt.rs/2UA8H5e

While fears of a no-deal Brexit have receded, investors still do not know on what terms Britain will exit the trading bloc.

Sterling’s strength was also due to increased bets on Brexit being delayed and a no-deal or economically damaging “hard” Brexit being averted.

Traders are expecting big swings in the currency around this week’s votes, according to a sharp rise in one-week implied volatility.

One-week implied volatility measures demand for options to hedge against big currency swings. A higher percentage reflects greater expectations of currency movements over the next seven days.

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