The British pound rose on Tuesday as opposition parties vowed to work together to try and prevent a no-deal Brexit, encouraging some traders to buy sterling even though most still fear the country is headed for a disorderly exit from the European Union.
Parliament returns from its summer break next week and is preparing for a battle with Prime Minister Boris Johnson, who has pledged to take Britain out of the EU at the end of October, with or without an exit agreement.
Labour leader Jeremy Corbyn on Tuesday hosted talks with other opposition parties and they agreed to try and stop a no-deal Brexit, including through passing legislation and a vote of no-confidence in the government.
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The pound was already rising but extended its gains after the news.
Sterling rose as much as 0.6% on the day to $1.2288 and 0.5% against the euro to 90.435 pence.
Investors are growing increasingly concerned that Britain is headed towards a no-deal Brexit on Oct. 31 that could disrupt trade flows and weaken the economy, though some also believe the currency has moved too far downwards.
“We are slightly positive on sterling in our portfolios as we think that a hard Brexit is already priced into the markets,” said Ugo Lancioni, managing director of global fixed income and currency management at Neuberger Berman.
“Though there is a risk that the pound could fall another 5% from these levels in a knee-jerk reaction to a hard Brexit, these levels are attractive. Also, in the case of a hard Brexit, the (Bank of England) BoE might launch a stimulus package.”
Despite Tuesday’s moves, many investors are skeptical about the opposition’s ability to stop Johnson.
Speculators cut their short positions against the pound in the week to Aug. 23, according to the latest CFTC positioning data, although outstanding shorts – at around $7 billion – remain close to their highest level in more than two years.
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“Sterling’s limited reaction to the trade tensions tells us the market’s focus is clearly on Brexit,” UBS global wealth management strategists said in a note on Tuesday, referring to the trade conflict between the United States and China.
“If the global economic outlook turns sour, the Bank of England could have to change tack and join the global central bank easing bandwagon. Thus, we acknowledge that risks have risen of the pound appreciating somewhat less than we forecast.”