Pound falls as traders brace for Brexit showdown with parliament's return

The British pound fell on Monday as traders braced for a clash between the government and lawmakers opposed to Prime Minister Boris Johnson's Brexit plans as parliament returns this week from its summer recess. Johnson has threatened to purge any lawmaker in his party who votes against the government on Brexit, a senior source in the office responsible for Conservative party enforcement said.

Sterling traders are preparing for the battle for Brexit to enter the endgame this week when opposition MPs, and possible ruling party rebels, seek to either change the law, or the government, in their drive to block what they say would be an economically damaging no-deal Brexit on Oct. 31. After plunging towards $1.20 in early August following Johnson's appointment and worries Britain was set to leave the European Union without a deal, the pound has bounced around the $1.22 mark in recent weeks. On top of developments in the parliament, sterling remains vulnerable to news around the UK's efforts to get the EU to reopen the Brexit withdrawal agreement.

Traders are expecting much more volatility in sterling in the coming months, with implied volatility gauges at or near their 2019 highs. Last week, Johnson's government announced parliament would be suspended for around a month in what critics called an attempt to squeeze the time opposition lawmakers had left to try and stop a no-deal Brexit before the end of October.

Parliament returns on Tuesday and opposition lawmakers are expected to propose legislation to force the government to postpone Brexit. "The pound will initially attempt to add to its recent gains if opposition MPs are successful in passing legislation in the week ahead. However, those gains could prove short-lived as it remains unclear how the government will respond to the request from parliament," MUFG analysts said in a note.

Sterling dropped 0.3% to $1.2130 in early London trading, while against the euro it weakened 0.2% to 90.52 pence. At 0830 GMT, the August Purchasing Managers Index for Britain's manufacturing sector is published. Economists polled by Reuters expect a reading of 48.4, slightly above the 48 reading of the previous month but still below the 50 threshold that separates growth of contraction.

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