Volatile pound recoups losses on Brexit delay hopes

A trader passes a customer their change in the form of a five pound sterling note and one and two pound coins. PHOTO: AFP

SINGAPORE (REUTERS) - The British pound recouped losses in the wake of a parliamentary vote that opened the door for another Brexit delay.

Sterling climbed as high as US$1.210 (S$1.681) in early Asian trade on Wednesday (Sept 4), helped by the possibility that a no-deal Brexit may yet be averted.

British lawmakers overnight voted to take control of the parliamentary agenda and scheduled another vote on Wednesday. If the vote is successful, it would force Prime Minister Boris Johnson to seek more time from the European Union and prevent leaving the bloc without a divorce deal.

The prospect of a so-called "hard Brexit" has been a major source of worry for currency markets. The pound had dropped under US$1.20 and hit its lowest since a flash crash in October 2016 on Tuesday.

More than three years after the UK voted in a referendum to leave the EU, the Brexit process remains unresolved and a source of major political chaos. Possible outcomes for Britain range from a turbulent "no-deal" exit to abandoning the whole endeavour.

Mr Johnson has said he will now push for a snap election, adding another major source of political uncertainty for sterling.

"We still just can't say what the end game will be," said Yukio Ishizuki, senior strategist at Daiwa Securities.

"Die-hard Brexiters want a Brexit no matter what while the Remainers are deadly opposed. This is not an issue in which both sides can come halfway for a compromise."

The US dollar meanwhile pulled back on Wednesday as weak US manufacturing stoked wagers on aggressive policy easing.

Manufacturing activity in the world's biggest economy contracted for the first time in three years last month, according to the Institute for Supply Management on Tuesday.

That knocked the wind from the greenback and rallied the bond market as investors increased bets on a couple of Federal Reserve rate cuts before Christmas.

A 25-basis-point cut is now fully priced in, while yields on benchmark 10-year Treasuries, which fall when prices rise, dropped to their lowest in two years.

As a result, the greenback gave ground to the yen, the Australian dollar and the pound.

"The expectation that the Fed will come to the rescue has increased," said Mr Rodrigo Catril, senior FX strategist at National Australia Bank in Sydney.

"But it's not a capitulation on the dollar. It's just merely stopped the recent rise of the dollar."

Against a basket of currencies, the dollar traded slightly lower at 98.944, which was 0.4 per cent below the two-year peak it touched on Tuesday.

The euro was steady around US$1.2087, a recovery from a 28-month low against the dollar that it touched on Tuesday, as investors priced in deeper negative interest rates for longer in the euro zone.

The yen rose to 105.99 per dollar before easing slightly to trade at 105.86 by 0008 GMT.

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