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Sterling Leaps to 21-Month High on Prospects of Brexit Delay, Second Referendum

The British pound has hit a 21-month high against the euro following increased speculation of a delayed Brexit and after Britain’s opposition party leader said he would now back a second referendum on EU membership.

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Sterling rose sharply on Tuesday, reaching levels against the euro last seen in the first half of 2017. At €1.164, the pound is currently worth 6 percent more than its 2019 lows. Against the dollar, the pound struck $1.328—its highest since October.

Political developments in the past 24 hours have been the catalyst for the British currency’s appreciation.

In the House of Commons on Tuesday, Prime Minister Theresa May promised MPs a vote on whether to delay the UK’s departure from the EU—now only 31 days away—or crash out without a deal if her proposed withdrawal agreement is rejected when a meaningful vote takes place on or before March-12.

Mrs May had previously been firmly against any delays but has been forced to concede ground in order to avoid mass resignations by Conservative MPs determined to avert no-deal.

GBP to EUR - 1 Week chart to 26 Feb
GBP/EUR - 1 Week chart to 26 Feb

Most political analysts believe that Article 50 extensions increase the likelihood that the UK remains in the EU—something that HSBC says will have the pound trading 17 percent higher, at $1.55—or at least secures a soft Brexit.

“If there is a confirmation that an extension is likely I think the pound could move another leg higher to $1.33 or even $1.34, but for now I think this will be it,” Lombard Odier’s head of global FX, Vasileios Gkionakis, told the Financial Times ahead of May’s address.

Should the UK end up remaining in the EU, it is likely to do so via a second referendum, which leader of the opposition Labour Party Jeremy Corbyn has said he will now back should his own version of Brexit, which includes a permanent customs union, be voted down this week, as is highly likely.

“There is excitement that a second referendum has become more likely which would open the possibility of cancelling Brexit,” MUFG’s Lee Hardman told Bloomberg. “We still think it is unlikely; we are just seeing an initial [currency] response which could be pared back over time.”

Sterling bulls should be wary given warnings from the research team at RBC, whose view mirrors to a degree that offered by MUFG. The Canadian bank has suggested that a Brexit delay is now fully priced in. Per its February-8 forecasts, it is far less optimistic than many others on the currency’s chances: it foresees GBP/USD ending the year at only $1.25 and GBP/EUR at only €1.08.

 

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