LONDON (BLOOMBERG) - The pound headed for its worst month since October against the dollar after UK lawmakers voted down Prime Minister Theresa May’s Brexit plan for a third time.
Sterling slid on Friday (March 29) to a three-week low immediately after the vote result, before paring losses.
The failure of May’s last-ditch effort to get her deal through Parliament leaves the UK with the choice between crashing out of the European Union without a deal in two weeks and seeking a long extension of its departure date.
The British parliament will vote on Monday on various alternatives to May’s agreement.
Sterling is still the best Group-of-10 performer of the year but coming months look more challenging with no respite in Brexit uncertainty.
Implied volatility on two-week pound-dollar options, which cover the current April 12 deadline for the UK’s exit, have surged to the highest level since the immediate aftermath of the 2016 Brexit referendum amid increased anxiety about a no-deal outcome.
“From our perspective, we think sterling has been trading with the benefit of the doubt for long enough,” said Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion Bank.
A close below US$1.30 this week “points to renewed pressure on sterling into Monday’s second round of indicative votes in Parliament.”
The pound fell as much as 0.5 per cent on Friday to US$1.2978, the lowest since March 11, before edging back up to US$1.3026. It weakened 0.2 per cent to 86.18 pence per euro.
The yield on UK 10-year government bonds was little changed at 1 per cent.
The European Council’s President Donald Tusk called an emergency EU summit for April 10, ahead of the current deadline for Britain to leave the bloc.
A no-deal Brexit in two weeks’ time is now “likely”, according to an EU spokesman.
While it’s not clear yet exactly what will be on the ballot paper on Monday, a majority is expected to be found for a softer Brexit, likely involving a customs union. This option was the closest to gaining lawmakers’ approval in a prior ballot on Wednesday.
“If they cannot form a consensus Monday about an alternative I would begin to worry,” said Rabobank strategist Jane Foley.
“Monday is extremely important. Today is a necessity, that deal has to be declared dead for MPs to move on and find something fresh.”