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UPDATE 1-Sterling volatility jumps before UK parliment Brexit votes

Updated: 29-01-2019 17:08 IST
UPDATE 1-Sterling volatility jumps before UK parliment Brexit votes

Sterling fell from recent multi-month highs on Tuesday and volatility rose in derivative markets as traders weighed whether lawmakers would back a parliamentary amendment that would effectively take a no-deal Brexit off the table.

The UK parliament will debate and vote later in the day on Prime Minister Theresa May's response to the overwhelming rejection of her Brexit plan earlier this month. But markets' main focus is on amendments that have been put forward by other lawmakers, especially one that provides for postponing the March 29 Brexit deadline should parliament not approve a divorce agreement with the European Union by Feb 26.

That amendment is considered the most likely to pass if the opposition Labour Party backs it, as many have indicated. Goldman Sachs analysts predicted on Monday the amendment was the most likely to pass and that risks of Britain crashing out without a trade agreement had fallen to 10 percent. However, sterling which recently scaled 2 1/2 month highs against the dollar at $1.3218 on optimism that a no-deal Brexit would be avoided, has retreated to stand at $1.3162. It had hit a low overnight of $1.3130.

Against the euro it was 0.12 percent lower at 86.93 pence, holding below Friday's 10-month highs around 86.18 pence . Unicredit noted some pullback in the pound was natural, since it has been best-performing major currency so far this year, rising around 4 percent to the dollar and euro. On a trade-weighted basis, it is at a 2 1/2-month high

"The risk that we get a disappointment in tonight’s vote is clearly there" Unicredit FX strategist Kathrin Goretzki said, though she noted the vote would not significantly dent optimism that parliament had taken control of the Brexit process to avoid a no-deal scenario. "We don’t expect this to be affected in a negative way in tonight's vote. Any correction will be temporary," she said.

Conservative lawmaker Graham Brady has put forward another amendment, calling for the Irish backstop arrangement envisioned by May's Brexit divorce deal to be removed and replaced with "alternative arrangements". That is not expected to pass. Voting will begin at 1900 GMT.

Nervousness was reflected in a rise in implied sterling volatility on options markets, which has fallen steadily since the start of the year. Overnight implied vol in particular raced to near 23 vol, the highest since Jan. 15, when lawmakers defeated May's Brexit deal. One-month implied vol rose to its highest in a week and a half at 11.2 vol, a day after seeing the biggest one-day rise since November.

Analysts at CBA warned that sterling's fate hinged on support from Labour lawmakers: "Without explicit Labour support, the Cooper-Boles amendment may struggle to win a Parliamentary majority even if it is helped by pro-Remain Conservative MPs." (Reporting by Sujata Rao, additional reporting by Virginia Furness; editing by Andrew Heavens, Larry King)