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UPDATE 3-Pound firms ahead of no-confidence vote in British PM May

Updated: 16-01-2019 21:05 IST
UPDATE 3-Pound firms ahead of no-confidence vote in British PM May

The pound firmed to a two-month high against the euro on Wednesday as markets focused on a no-confidence motion against British Prime Minister Theresa May's government, a day after lawmakers defeated her Brexit divorce deal.

Although they expect May to survive after securing the backing of her own party's rebels and Northern Irish allies, the scale of Tuesday's rout might force her to pursue other options.

These include a second Brexit referendum vote, a general election or even a renegotiated deal, although with a March 29 deadline for Brexit, the outlook for British assets is unclear.

"We remain cautious on UK assets at the moment," Chris Morris, senior portfolio manager for global fixed income at Amundi, said on Wednesday, adding that he expected "quite a bit more clarity" in the coming weeks.

The pound strengthened to 88.52 pence per euro - its strongest level since late November, while against the dollar, it was a shade firmer at $1.2874.

Bank of England Governor Mark Carney said sterling's rise after May's plan was defeated suggested investors felt the risk of a no-deal Brexit had diminished, or that the process would be extended.

"The expectation that May is now set to seek cross-party backing for a new deal is also reassuring for investors since this suggests an effort will be made to find a compromise with broader appeal," Rabobank strategists said in a note.

A member of May's Conservative Party on Wednesday submitted legislation making provisions for a second referendum on Britain's departure from the European Union.

Expectations that Britain may be inching towards a "softer" Brexit is also playing in the currency derivative markets.

Implied volatility on the pound for three months edged back towards November lows, indicating markets are slightly more optimistic about the pound in the short term.

"We still anticipate a decent looking Brexit bill will be passed and any concessions from the prime minister could result in a 'softer' Brexit," Hamish Muress, currency analyst at OFX, said.

(Reporting by Saikat Chatterjee, Dhara Ranasinghe and Maiya Keidan; Editing by Alexander Smith)