Sterling traded above US$1.30 for the first time since May on speculation Prime Minister Boris Johnson may win parliamentary backing for his Brexit deal as soon as this week.
The premier will try Monday to get the House of Commons to endorse in principle the divorce agreement, after an attempt at the weekend failed. Although that triggered a knee-jerk drop at the market open, the pound recovered in London trading, with strategists arguing that any dip would prove short-lived. U.K. government bonds slid and stocks were little changed.
With the parliamentary vote likely to be decided by fine margins, sterling failed to build on gains after breaching the US$1.30 mark. The U.K. prime minister needs to garner support of 61 Members of Parliament to back his deal — he likely has 62, according to a Bloomberg analysis.
“It’s all to play for and while the numbers in parliament are extremely tight, we would give the probability of success for the government at 60 per cent either today or tomorrow,” strategists at MUFG, including Lee Hardman, wrote in a client note. “We would expect to see sterling into a new equilibrium range of $1.30-$1.35 if parliament approves the deal as we expect.”
The pound rose as much as 0.2% to $1.3012 after a four-day run of gains last week. Gilts sank, with the 10-year yield climbing five basis points to 0.76%, while the domestically focused FTSE 250 index of stocks held two weeks of gains.
“The price action today suggests that the FX investors are fairly comfortable holding on to their pound positions, notwithstanding the lingering political uncertainty in the U.K.,” said Valentin Marinov, head of Group-of-10 strategy at Credit Agricole SA. “This could point at further pound resilience on the back of abating concerns about a no-deal Brexit and/or hopes for a Brexit deal.”
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Some analysts remained cautious, given a set of potential amendments on a second referendum and a customs union is being considered.
“Even if there is a positive outcome for the government, then the next set of risks are the actual amendments,” said Petr Krpata, chief currency strategist at ING Bank. If the customs union motion is passed “there is a risk that the whole bill will lose the support of the hard-line Conservative Brexiteers and the deal won’t eventually have a majority. So still plenty of uncertainties.”