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Business News/ Market / Stock-market-news/  Pound rallies as Theresa May agrees to let lawmakers debate Brexit plan
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Pound rallies as Theresa May agrees to let lawmakers debate Brexit plan

Wednesday's rally saw the pound regain just a fraction of its 4.9% loss versus the dollar over the previous four days

Theresa May made it clear that the vote shouldn’t be used to block Brexit or ‘undermine the negotiating position of the government’. Photo: APPremium
Theresa May made it clear that the vote shouldn’t be used to block Brexit or ‘undermine the negotiating position of the government’. Photo: AP

London/Singapore: The pound surged against the dollar, heading for the biggest gain in almost two months, after UK Prime Minister Theresa May accepted that Parliament should be allowed a say on her plan for taking Britain out of the European Union.

Sterling climbed at least 0.6% against all its 31 major peers. The move by the British prime minister eased investor concerns that May would be taking a gung-ho approach to the discussions, even as she asked lawmakers to give her space to negotiate.

Wednesday’s rally saw the pound regain just a fraction of its 4.9% loss versus the dollar over the previous four days. It has dropped 18% since Britain voted in June to leave the European Union and more than 5% this month on mounting concerns over the prime minister’s hard-line stance. While May’s concession will not give Parliament a vote on whether to leave the EU or not, it does give lawmakers in favour of maintaining close ties to the 28-nation trade bloc a tool to pressure the premier.

“It’s definitely constructive," said Hans Redeker, Morgan Stanley’s chief global currency strategist in London. “The vote is a major concession that does reduce the room to manoeuvre for Theresa May’s government in the negotiation. That is currently read as positive for sterling."

The pound climbed 1% to $1.2249 as of 1:23 pm in London, set for the biggest gain since 16 August. Sterling strengthened 1.3% to 89.98 pence per euro.

Flash Crash

Sterling weakened this month amid concern that the government will pursue an exit strategy that will see Britain give up its membership of Europe’s single market to secure greater control of immigration and lawmaking. Hedge funds and other large speculators increased bets on a weaker pound versus the dollar to a record last week, according to data provided by the Commodity Futures Trading Commission going back to 1992.

“Given how aggressively short the pound the market was positioned, the prospect of UK parliament at least discussing the downside of a ‘hard Brexit’ has encouraged substantial profit-taking on those positions," said Sean Callow, a senior strategist at Westpac Banking Corp. in Sydney.

Parliament Debate

UK lawmakers are debating a motion from the opposition Labour Party calling for Parliament to be able to “properly scrutinize that plan" before May begins formal talks. She tabled an amendment which effectively accepted the motion. May made it clear that the vote shouldn’t be used to block Brexit or “undermine the negotiating position of the government."

Speaking in Parliament on Wednesday, May promised lawmakers would get to debate her negotiating strategy, but refused to say whether they would also get a vote. Asked explicitly during her weekly questions session whether there would be a vote, May refused to rule it in or out. “The idea that parliament wasn’t going to be able to discuss, debate, question issues around" Brexit was “frankly completely wrong," May said, over interruptions. “Parliament’s going to have every opportunity to debate this issue."

“It’s not a game-changer and we would sell the pound rally within 24 hours," said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank Ltd. “The hope is that Parliament will have a moderating influence over her cavalier approach so far, but we wouldn’t count on it. Crucially, May has not agreed to let Parliament vote on whether Article 50 will be activated, and that’s what really matters."

Pessimistic Traders

A London court this week will rule whether May can trigger Article 50 of the Lisbon Treaty, which starts an exit, without approval from her fellow lawmakers.

Options traders are more pessimistic on the pound than on any of its developed-market peers. They were paying a 2.3 percentage-point premium for six-month contracts to sell the pound versus the dollar over those to buy, data compiled by Bloomberg show.

A measure of the pound’s historic volatility versus the dollar has jumped to the highest in almost three months, highlighting investor concerns about short-term sterling risk. One-week pound-dollar historic volatility was at 21.57% on Wednesday, data compiled by Bloomberg showed. A one-week implied measure of future swings is also at the highest since July.

Brexit is “a very fluid situation," said Peter Rosenstreich, head of market strategy at Swissquote Bank SA in Gland, Switzerland. “As we see the evolution, that’s going to continue to drive volatility in sterling. Extrapolating what exactly the relationship will look like in six months or longer is an exercise in futility." Bloomberg

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Published: 12 Oct 2016, 09:10 PM IST
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