Six-month Brexit delay sends sterling into the doldrums

LONDON (Reuters) - The pound stumbled below $1.31 on Thursday after a delay of up to six months to Brexit left traders scratching their heads about the direction for the British currency, with few expecting wild price swings in the months ahead.

FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

The overnight deal at an emergency EU summit to postpone Britain’s exit from the bloc to Oct. 31 meant it would not crash out on Friday without a treaty to smooth its passage. Prime Minister Theresa May’s request for a shorter delay to June 30 was rebuffed by the 27 EU member state heads of government.

Yet the decision failed to bring clarity on when, how or even if Brexit will indeed happen. Bets on sterling rising or falling sharply remain few and far between as traders sit it out on the sidelines.

One-month implied volatility - an indication of investor expectations for price movements in the pound - plunged to its lowest since August 2018.

(Graphic: Sterling volatility plunges,

The three-month and six-month measures were back at January 2018 levels.

(Graphic: Six-month sterling implied volatility,

That partly reflects the removal of an immediate risk of a no-deal Brexit - which was expected to have hammered the pound - but it is offset by prospects of a British Conservative Party leadership vote for a replacement for May, a general election, and the threat to the British economy of further uncertainty.

“It isn’t brilliant for the economy, to add uncertainty on top of uncertainty,” Societe Generale currencies analyst Kit Juckes said, while adding that creating more time to prepare for leaving the EU would help support the economy.

The pound has been stuck between a range of $1.29 and $1.34 since mid-February, with less volatility than in earlier periods of Brexit-related disarray.

On Thursday the pound edged lower to $1.3085 by 1420 GMT, while against the euro it was marginally weaker at 86.195 pence per euro.

“Going forward, pushing out No Deal risk will support the pound around the $1.3000 level against the dollar but the lack of immediate clarity means that the pound is unlikely to break above the $1.3400 level,” MUFG analysts said in a research note.

May on Thursday defended her decision to delay Brexit and seek a compromise with the opposition Labour party. Jeremy Corbyn, the Labour leader, said the government had indicated a willingness to compromise.

May has lost her previous attempts at getting her withdrawal deal passed by Britain’s parliament.

The Daily Telegraph reported earlier this week that May was considering offering lawmakers a vote on whether to hold a confirmatory public vote on her Brexit deal in a bid to resolve the impasse holding up parliamentary ratification.

Additional reporting by Tom Finn; Editing by Mark Heinrich and Ken Ferris