October 25, 2019 / 9:16 AM / a month ago

Pound languishes in red as UK waits for extension and election decisions

LONDON (Reuters) - Sterling edged down on Friday as the European Union failed to set a date for Britain’s departure from the bloc while the UK parliament squabbled over Prime Minister Boris Johnson’s call for an election to break the deadlock.

Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester, Britain, September 21, 2018. REUTERS/Phil Noble/Files

EU ambassadors agreed in principle to a delay beyond the Oct. 31 deadline, but will not decide the length of the extension until Monday or Tuesday, an official said.

A source close to French President Emmanuel Macron said an extension was not justified at this stage.

The pound fell on the news and was trading down 0.2% against the dollar at $1.2833, though it held above the one-week low of $1.2790 hit on Thursday after Johnson called for an election.

Versus the euro, it slipped to as much as 86.38 pence, losing the week’s minimal gains.

Graphic: World FX rates in 2019 — tmsnrt.rs/2egbfVh

Johnson’s spokesman said the government would push ahead with Brexit if lawmakers did not agree to an election.

Labour leader Jeremy Corbyn says he will only support an election if a no-deal Brexit is taken off the table.

“It seems like (there is) this weird feedback loop of uncertainty from the UK parliament leading to the EU not making a decision, leading to the uncertainty in the UK parliament,” said Jordan Rochester, FX strategist at Nomura.

Sterling is down 1.2% so far this week, ceding half the gains made last week when it rallied the most in two years on news that the British and Irish Prime Ministers could “see a pathway to a possible deal”.

It is still up 5% to the dollar this month as risks of a no-deal Brexit have tumbled, heading for its best month since January 2018.

Graphic: Sterling rallies in October - here

Meanwhile sterling’s upside should be limited.

Thu Lan Nguyen, FX strategist at Commerzbank, noted the risk of “running round in circles”.

“We will see more volatility if we have more elections in December - as soon as the date’s set and decided I would expect implied volatility in the one- to two-month horizon to rise again,” she said.

Sterling-dollar implied volatility - expectations of future price swings - on a one-month maturity were down to 9.4% on Friday, the lowest in more than five weeks . But the three-month contract touched a four-day high at 10.2%, as election jitters and fear of prolonged Brexit uncertainty crept in.

Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

Reporting by Elizabeth Howcroft; Editing by Toby Chopra

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