The sterling rallied to a one-week high on Thursday after legislators voted to force PM Johnson to seek a three-month halt to Brexit if he failed to secure a divorce agreement with the European Union.
Political ambiguity remained high — Johnson renewed his efforts to seek an election next month after a first try was defeated Wednesday — however, market spectators were relieved that at least a no-deal Brexit seemed to be avoided.
The British currency advanced 0.4% to above $1.23, its highest since Aug. 28 and building on an overnight 1.4% hike, its steepest one-day jump since March.
Investors have ignored the pound in recent times as concern grew that Britain would crash out of the EU with no deal. On Monday, it dropped to below $1.20.
UBS analysts said a pause to Brexit until January 2020, and an election after October could drive the pound as high as $1.30, a four-month high.
The rally reverberated through the derivative markets as well. Two-month implied levity marks for pound options, which cover the Oct. 31 deadline for Brexit, fell. The slump in expected price swings for the pound indicated markets were loosening extreme short-period destructive bets.
Despite the rebound, the British currency remained over 8% below March’s 2019 highs of almost $1.34, on worries an election is the only method to break the political impasse.
“Nonetheless, with the outcomes from any election so hard to forecast and the problem of still fixing on a deal, we predict further pound rallies are likely to be limited until we have clarity on a result,” said John Marley, a senior FX consultant at FX risk management specialist.