Ahead of Tuesday’s “meaningful vote” on the Brexit withdrawal agreement, the British pound has strengthened to a 7-week high against the dollar—evidence that investors are increasingly optimistic that a soft Brexit can be achieved.
The pound put its best foot forward on Monday as it rose to a 7-week high of $1.288, one day before a crucial Brexit vote in the House of Commons. Against the euro, the pound is at its strongest level in 5 weeks, at €1.117.
Though a government defeat is expected in the “meaningful vote”—the vote by British MPs on whether to accept or reject Prime Minster May’s EU withdrawal agreement—the risk of a no-deal Brexit has seemingly diminished in the eyes of investors.
“All pathways are leading to a soft Brexit,” Bank of America Merrill Lynch wrote this weekend.
“The growing anti-no-deal majority suggests that Parliament could pull all the stops to prevent a chaotic exit from the EU, which may benefit the pound,” said a note received from Citibank researchers on Monday.
In spite of last week’s disappointing UK manufacturing data, the pound has recovered strongly since a “flash crash” took it to a 21-month low against the dollar on January 3rd—a low of only $1.2373. The pound remains, however, more than 10 percent lower against the dollar than its level in June 2016, prior to the UK’s referendum on EU membership, and more than 14 percent lower against the euro.
Massive sterling gains can be expected should May’s withdrawal agreement unexpectedly receive Parliament’s backing on Tuesday, but with a deal rejection largely priced in, traders shouldn’t expect much more than a minor sterling slip should that be the result, so long as talk turns quickly to an extension of Article 50, a second referendum or other soft or no-Brexit option.