UK Gets Last Chance For Orderly Brexit, Sterling Rallies

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Today, the value of the sterling rallied which was helped by a weaker euro. It also comes after the leaders of the European Union gave Theresa May, the British Prime Minister, a two-week reprieve to make a decision on how the United Kingdom will leave the European Union.

The disappointing results of the economic survey in both the eurozone and the United States heightened the volatility across currency markets today and added to the gains of the pound.

The euro was considered as the biggest loser was as investors grew increasingly concerned regarding the outlook for the global economy.

Last Thursday, the sterling had dropped in its biggest one-day decline of the year as fears mounted that the United Kingdom would crash out of the European Union on the 29th of March without a deal.

The European Union has said that the United Kingdom can have a short delay to Brexit, as requested by PM May, however, she must first win parliamentary approval for her withdrawal deal from the bloc.

PM May has already lost two attempts to secure the support of the parliament and with the odds piled against her for another vote next week, the risk of a no-deal Brexit has sharply increased.

The leaders of the European Union have described the two-week extension as the last chance for the United Kingdom to secure an orderly Brexit.

Jordan Rochester, a strategist at Nomura FX, stated: “Last night’s move by the EUCO (European Commission) has lowered the immediacy of hard Brexit risk next week.”

He added: “But no deal can still happen if Theresa May were to wish it, either next week or on 12th April.”

The pound was up by 0.6 percent at $1.3188, while its gains versus the euro were as high as 1.5 percent to 85.49 pence. The gain was mostly on the back of weakness in the single currency after the disappointing data out of Germany.

Today, Franklin Templeton said that there was a 30 percent chance of the United Kingdom crashing out of the European Union without a deal. It is relatively higher as compared the most of the forecasts of the bank of approximately 10 to 20 percent. On the Betfair exchange, no-deal Brexit odds have fallen under 5 percent.

David Zahn, the head of European fixed income at Franklin Templeton, stated: “We’d expect sterling to remain range-bound, with the latest headlines dictating its movement. It should be a similar story for UK government bonds. We’d expect gilts to remain quite well bid until we get more certainty.”

Currency derivative markets warned of a growing caution for the pound, with one-month risk reversals on sterling versus the dollar and the euro diving to multi-month highs.

An indicator of how bullish or bearish investors are on the outlook of the currency, the so-called risk reversals signal that short-term negative bets on the pound are rapidly piling up despite the broader calm in the spot markets.

According to data from Refinitiv, one-month risk reversals on the pound versus the euro fell to their lowest levels since mid-2017. Against the dollar, bearish bets increased to their highest levels since September 2017.