Sterling hangs on a thread

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By :  ,  Financial Analyst

Those ‘no-deal’ trades are past due a dust-off, but sterling bulls are keeping the faith

Traders keep finding reasons to discount ‘crash-out’ risk. For one, retail data showing British shoppers were defiant of the gloom for yet another month. The Bank of England’s slight upgrade of first-quarter growth for another. Sterling’s range against the dollar in five sessions has extended to the downside on Thursday but remains quite contained to about 200 pips.

This looks defiant and optimistic after Prime Minister Theresa May revived no-deal odds by insisting on only a short extension of the Article 50 period. Now, the government plans to bring its deal back to parliament for a third vote, relying on precedent that suggests it can do so if The House wishes. The odds of it passing are not great. And what if the EU is not bluffing when it says an extension depends on parliament approving May’s deal? Then Britain will crash out.

One alternative scenario may be supporting sterling:

  • Note PM May’s hint that she might resign if Brexit isn’t delivered by 30th June
  • With May gone, Brussels may conclude a hard-line Conservative would struggle to replace her
  • The EU could therefore mandate an extension well past 30th June

It’s a patently threadbare rationale. Risk of another blindsiding twist is high. That’s why short-term volatility expectations are inching back to last week’s levels, the highest since July 2017. Still, it would probably take a break outside sterling’s one-week range for buyers to lose the faith.

Related tags: Forex Brexit GBP

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