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The pound rose for a second day as the U.K. government said it had secured changes to its divorce deal from the European Union and planned to hold a vote in the U.K. parliament.
Sterling climbed as much as 1.1 percent after gaining 1 percent on Monday amid optimism that progress is finally being made to resolve the Brexit standoff. European Commission President Jean-Claude Juncker urged the British parliament to approve the deal as he and U.K. Prime Minister Theresa May briefed reporters following a meeting in Strasbourg.
“We remain optimistic that a hard Brexit will be avoided, and that in our view should put a floor on GBP,” said Rodrigo Catril, a senior foreign-exchange strategist at National Australia Bank Ltd. in Sydney. “If PM May gets her deal through, that would be very positive for GBP, but an avoidance of a hard Brexit and an extension would still be good news and see GBP head toward 1.35.”
Juncker published clarifications to the Brexit deal in a letter posted to Twitter, warning “it is this deal, or #Brexit may not happen at all.”
May put forward three new documents intended to provide additional legal guarantees that the U.K. can’t be trapped indefinitely inside the backstop arrangement. The status of these documents will be scrutinized intensively during Tuesday’s debate. The papers include a “unilateral declaration” setting out how the U.K. believes it can escape the backstop.
READ: Pound Set for Wild Ride: Strategists See Possible Range of 10%
Even so, it remains unclear whether the new wording will be enough for the British Parliament to sign off on the plan when it votes Tuesday.
The new agreement seems to fall “short” of the plan Parliament wanted to see, said Steve Baker, a pro-Brexit member of May’s Conservative Party. A panel of euro-skeptic politicians will examine May’s latest blueprint in detail, he said. May’s Attorney General Geoffrey Cox is expected to set out his formal legal opinion on the changes on Tuesday.
“The situation is very fluid but the market is perceiving hard Brexit scenarios as increasingly unlikely,” said Vassili Serebriakov, a macro strategist at UBS Securities LLC in New York.
As rising hopes for a deal curb some of the pessimism around U.K.’s economic outlook, traders are putting Bank of England’s rate increases back on the agenda. That could see gilts begin Tuesday’s session on a weaker note when trading gets underway in London. As of Monday’s close, sterling money markets were pricing less than 50 percent chance of a rate hike by December.
The pound pared some of its gains against the dollar amid selling by leveraged and macro funds, and was up 0.4 percent at $1.3207 as of 12:25 p.m. in Singapore. It advanced 0.3 percent to 85.26 pence per euro after appreciating to 84.76 pence, the strongest since May 2017.
If Parliament rejects the deal on Tuesday, May has promised to give the House of Commons a vote on whether to leave the EU without an agreement on Wednesday. If members of Parliament choose to veto a no-deal Brexit, they will then get a vote on whether to delay the U.K.’s departure from the bloc.
The uncertainty is enough for Stuart Simmons, senior portfolio manager at QIC Ltd. in Brisbane, to avoid trading sterling.
“There’s been too many false dawns,” he said. “While the outcome will likely be positive in the long run, the risk-reward just isn’t attractive.”
–With assistance from Chikako Mogi and Stephen Spratt.
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