Daily Brexit update: Why sterling isn’t falling off a cliff

Despite a likely defeat of the Brexit Bill next week, sterling's resilient.

Daily Brexit update: Why sterling isn’t falling off a cliff

Despite an increasingly likely defeat of the Brexit Bill next week, sterling looks resilient. Traded against the dollar, the pound is rounding off the North American session down 40 odd pips, but that’s still fully 2.4% higher since lows on 2nd January. Sterling got going against the euro a bit slower last week but had advanced as much as 143 pips above 4th January’s low by the middle of Europe’s session before softening again. Even as a terrible week in British retail unfolds, sterling isn’t exactly falling off a cliff. Shares in multiple high-profile firms saw double-digit percentage losses on Thursday alone as consumers grow more cautious, partly on Brexit uncertainty. At the same time, the opposition Labour Party is pushing harder for a general election if Parliament votes against Theresa May’s Brexit deal. Labour leader Jeremy Corbyn is also increasing calls for a fresh referendum, but the risk that a he could lead the next government is generally regarded as a negative for sterling, given nationalisation policies and others that could deepen the budget deficit. In short, sterling is proving remarkably robust for now and this shows in the highly sensitive options market. Earlier this week, premiums for expiries under one month projected the lowest risk of sharp moves against the dollar in six months.

The key to the market’s growing ease appears to be signs that Parliament is taking a tougher line. That was most obviously expressed this week by votes that sharply weaken Downing Street’s power to push through a no-deal Brexit. The next five days still promise to be some of the most unpredictable seen in British politics for years. But chances that the market’s worst fears will be realised are clearly declining.

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