As the UK’s Parliament finds itself deadlocked over Brexit, its currency may finally be starting to wriggle free.
Pressure on the pound should ease as the political outcomes seen as most likely in the next week will cut the odds of Britain crashing out of the European Union (EU) without a deal this month. Lawmakers will need to back Prime Minister Theresa May’s deal or the process of leaving the bloc would have to be extended.
"It’s quite clear now that Parliament doesn’t want a no-deal," Mike Bell, a money manager at JPMorgan Asset Management, told Bloomberg Television Friday.
"If you saw a long extension, then you could see the pound rally a little bit. If you see the deal actually approved in the next couple of weeks – and a short extension to back that up – then you can see sterling north of $1.35."
The pound notched up its best week since January, trading around $1.33, after lawmakers voted to take a no-deal Brexit off the table and instead ask the EU for an extension to the Article 50 deadline of March 29.
May is set to bring her deal back for a third attempt this week, the failure of which could herald an extension of over a year. European leaders are due to meet and discuss it – or sign off on a deal – at a summit Thursday.
That binary choice could shore up support for May’s deal from more hardline Brexit-supporting members of her own party, who fear the UK not leaving the EU at all.
Toronto-Dominion Bank still believes that it will be a "narrow failure" and is closely watching how Northern Ireland’s Democratic Unionist Party is likely to vote as a barometer for the currency, according to European head of foreign exchange strategy Ned Rumpeltin.
"A lot of the expectation that things should be OK from here looks baked into the cake," he said.
The pound has climbed around 4% this year, making it the best-performing major currency.
Volatility is still elevated, after a one-week gauge of swings spiked to the highest in nearly three years. The coming week will also be busy for traders, with UK jobs data Tuesday, inflation Wednesday and the Bank of England meeting on Thursday.
Money markets are currently pricing in a 40% chance of a Bank Of England interest-rate hike by December, up from as low as 30% after May’s deal was rejected.
The growing sentiment on sterling is reflected in increased demand for call options over one month to a year, though risk reversals remain in favor of puts. Citigroup is recommending investors short the euro versus sterling.
"The range of potential scenarios seems to be collapsing into a deal, or a long extension," said Adam Pickett, a foreign-exchange strategist at Citigroup. "This is positive for the pound."