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Sterling’s up and ready to swing hard

The pound has become a broad risk proxy; all the more reason to watch for reversals

Having dipped at Sunday night’s open the pound is holding above the last few sessions’ lows. Prime Minister Boris Johnson will take another stab at getting parliamentary approval of his Brexit deal when the Commons sits from 2.30pm BST. Since being outmanoeuvred on Saturday by MPs seeking to ensure Britain won’t leave the European Union before 31st October without a deal, markets (and the press) appear more convinced that Johnson’s plan could scrape the necessary number of votes to pass.

Sterling is continuing its infrequent role of risk proxy as the Brexit clock runs down. Stocks most connected with the fate of British politics and economy were firm, just a little earlier, enabling the FTSE 250 index to lift 0.4%. The DAX index, which houses makers of the current best-selling cars in the UK, among other links, outperformed Europe’s major indices.

Markets only tenuously attached to Britain are positive too. A combination of global exporters and the very biggest British institutions kept the FTSE 100 benchmark two tenths of a percentage point up as another potential ‘crunch’ parliamentary session looms. Insurer Prudential rose 7%, partly as investors priced in a higher combined valuation from M&G which debuted as a separately traded entity earlier. Auto Trader and Centrica rose 3.5% each. Miners Glencore and Antofagasta both added 3%.

As per the last few weeks, increasingly confident and broad sentiment is exposed to unpredictable immediate developments and gnarly political procedure. For now, the Speaker of the House, John Bercow, who has form in frustrating attempts to expedite Brexit, is once again a fulcrum. There’s little indication whether he will veer towards the principle of preventing repeated votes on the same motion or will recognise the amendment on Saturday as a material enough change to the Withdrawal Bill, which of course was not directly voted on at the weekend. If Bercow allows a vote, but MPs attempt to amend it, Downing Street has signalled it will pull the vote for a second time.

Newly assured sentiment only goes so far. Short-term sterling volatility indicators continue to show that the cost of protecting against dangerous price swings is the highest it’s been for years. One-day ‘vanilla’ implied volatility rose 33.3% to the highest since June 2017. One-week trades, covering the days almost to the brink of the Brexit deadline, haven’t cost more since March 2009.

GBP/USD one-week at the money implied volatility [21/10/2019 13:54:12]

Source: Bloomberg/City Index

Investors still half believe that almost anything could happen over the next few hours. Positive though increasingly tense sentiment suggests the pound faces further buffeting in the event of further significant upsets on the path towards increased Brexit certainty. Still, so long as the impression of support holds for the current withdrawal bill, the pound, the euro UK and European indices could remain underpinned. If any vote is delayed till Tuesday, or perhaps even later in the week, it makes sense that some of those underpinnings could begin to fall away.

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