Sterling traders eye vote on early election after big rebound

The British pound edged lower on Friday after a tumultuous week in which it plunged to three-year lows before rebounding strongly as lawmakers voted to block a no-deal Brexit, making a snap election more likely. Opposition parties will discuss on Friday how to respond to Boris Johnson's bid to call a snap election after the prime minister said he would rather die in a ditch than delay the planned Oct. 31 departure from the European Union.

Lawmakers will on Monday hold another vote on a motion on whether to hold an early election. Opposition parties want to ensure that an election does not allow Johnson to lead the United Kingdom out of the EU without a deal next month. Sterling fell 0.2% against the dollar to $1.2305, but it is still far above the sub-$1.20 three-year lows hit on Monday. It has gained more than 1% this week - putting it on track for its best weekly performance since June.

Against the euro the pound dropped 0.3% to 89.76 pence, leaving the British currency close to its strongest level since July 25. "The main threat to sterling's recovery is if Johnson’s Conservative party were to win with a majority in an early election. They could then overturn the legislation requiring them to ask for an extension, increasing the threat of leaving without a deal," said Mark Haefele, Chief Investment Officer, UBS Global Wealth Management.

Haefele predicted that the pound would weaken to $1.15 or lower in the event of a no-deal Brexit. While huge uncertainty about the political outlook in Britain remains, investors have taken solace from lawmakers' determination to block a no-deal Brexit that economists say would be severely damaging for the UK economy.

Expectations for sterling price swings in the months ahead have fallen sharply as the risk of a no-deal exit from the EU receded, with implied volatility gauges back to levels of mid-August after spiking to their highest in 2019 earlier this week.

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