Sterling bounces 1% as UK lawmakers battle to avert no-deal Brexit

Sterling jumped 1% against the dollar on Wednesday to trade above $1.22 for the first time since Aug. 30, after British lawmakers seized control of the parliamentary timetable to try to block a no-deal Brexit.

Lawmakers who defeated Prime Minister Boris Johnson's government late on Tuesday are expected to introduce a bill on Wednesday seeking to stop Britain from leaving the European Union on Oct. 31 without transitional arrangements. Johnson, meanwhile, is expected to table a motion for an early election.

The latest sterling moves take it further off three-year lows of $1.1959 hit before the parliament vote. "The market will assume that the vote tonight passes," said Kit Juckes, macro strategist at Societe Generale, noting that the government's defeat in parliament had reduced the probability of a no-deal Brexit.

While that is sterling-positive, the prospect of further prolonging Brexit uncertainty "will reduce sterling's potential upside," he added. The pound vaulted briefly past $1.22, rising 1% to a one-week high of $1.2220 as it was boosted also by a 0.4% dollar pullback sparked by Tuesday's dismal U.S. manufacturing data.

Against the euro, the pound rallied 0.5% to 90.3 pence . Sterling volatility gauges also eased, with two-month implied vol, a contract capturing the Oct. 31 Brexit deadline, falling from three-year highs reached on Tuesday.

Appetite for sterling was not dented even by weaker-than-expected services purchasing managers' (PMI) survey, though the figures came as a reminder that Britain's economy is in serious danger of entering its first recession since the financial crisis. The PMI fell to 50.6 in August from 51.4 in July. A Reuters poll had forecast a smaller decrease to 51.

More big price swings are likely in coming days as the battle over Brexit enters another crucial phase. Possible outcomes range from a turbulent no-deal exit to abandoning the whole endeavor. The British currency is now the second-worst performing major currency year-to-date, according to Refinitiv data. Except for lows plumbed during an October 2016 "flash crash", sterling's Tuesday fall took it towards levels not seen since 1985.

That $1.05 record low could be breached if Britain hurtles into a no-deal Brexit, some reckon. But its current respite may also be short-lived, especially if a snap election is called. That would open up a new set of scenarios including the possibility of Labour leader Jeremy Corbyn becoming prime minister.

"Not only uncertainty about the election outcome (thus various possible Brexit options) remains high, but the most probable alternatives don't appear to offer much of a respite for sterling," ING analysts told clients. "We see Brexit/early election as underpriced by the market and look for more downside to sterling," they added.

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