LONDON (Reuters) - The pound extended gains against the euro on Friday, putting it firmly on track for its biggest monthly rise since February as a broad-based drop in the single currency against its rivals encouraged investors to buy the British unit.
The euro fell more than 0.5% drop against the Japanese yen and the Australian dollar, but the pound’s gains against the single currency were contained as investors braced for a tense opening to the British parliament next week.
Though the pound is still above a 2-1/2 year low of $1.2015 it reached this month, it could see bigger moves with action around the Brexit crisis during the parliamentary session. That will last until Sept. 9-11, before a one-month suspension following Prime Minister Boris Johnson’s controversial move to prorogue parliament.
The opposition Labour Party said this week it would trigger an emergency parliamentary debate next week to try to stop Johnson taking Britain out of the European Union without a withdrawal deal.
Some of the moves in the pound were partly exaggerated in typical Friday afternoon trading.
“Though the threat of a no-deal Brexit is higher than before, extreme short positioning has been partially the reason for its strength and also some investors see value in the pound around these levels,” said Neil Mellor, a senior FX strategist at BNY Mellon in London.
Some money managers even sense an opportunity, believing the British currency is cheap, and the government’s gambit could make clinching a new withdrawal deal with the EU more likely.
Versus the euro, the pound gained 0.4% to 90.38 pence. On a monthly basis, the pound is set to rise 0.8%, its biggest monthly rise since February against the euro.
On a weekly basis, the British currency is set for a third consecutive weekly rise versus the euro.
Despite this week’s events, most big banks still see a no-deal Brexit on Oct. 31 as an unlikely outcome. Some such as JP Morgan assess that probability at 35% - up from a previous 25% - while others such as Nomura and Deutsche Bank put it at between 40%-50%.
UBS Wealth Management believes the market is pricing in a higher probability of around 50% for a no-deal Brexit which UBS considers too high, prompting the money manager to be tactically bullish on the pound versus the greenback.
The median forecast for a disorderly Brexit - whereby no deal is agreed - jumped in an Aug. 2-7 Reuters poll of economists to 35%, up from 30% given in July and the highest since Reuters began asking this question two years ago.
Against the dollar, the pound was broadly steady at $1.2173 and not far away from a 2-1/2 year low of $1.2015 reached earlier this month.
Reporting by Saikat Chatterjee; Editing by Gareth Jones and Frances Kerry