LONDON (Reuters) - Sterling shot higher on Wednesday after British lawmakers voted resoundingly against leaving the European Union in 16 days’ time without a transition agreement.
Britain’s parliament voted against the risk of a “no-deal” Brexit, 24 hours after a second defeat for Prime Minister Theresa May’s divorce agreement left Britain heading into the unknown.
Lawmakers will vote on Thursday on delaying Britain’s EU departure beyond March 29.
The pound strengthened on hopes of a delayed Brexit, a move which investors said could increase May’s chances of getting her deal with the EU through parliament or lead to Brexit being called off altogether if a second referendum is held.
The currency was headed for its biggest daily gain against the dollar in 2019.
“No to no-deal (on 29 March)! On reflection... a big win for the pound. A majority in parliament are choosing economic rationale over party politics and that reduces the odds of a disorderly Brexit,” said Viraj Patel, a currency strategist at Arkera, a financial technology firm.
“This is the only majority that we have on Brexit and increases the odds of getting certainty one way or the other, either through a deal or via a push to avoid Brexit altogether,” he added.
Sterling was up more than 1 percent against the euro and the dollar before the result but it surged higher after May said that lawmakers would vote on Thursday on delaying Brexit.
After the vote, at 1950 GMT, the pound was up 1.5 percent near the day’s high of $1.3280.
It was up 1 percent versus the euro at 85.48 pence, though remained below a 22-month peak of 84.755 pence touched on Monday before hopes for May’s Brexit deal to pass the second time round were crushed.
Sterling has swung wildly in the last 48 hours between $1.30 and $1.33 and at junctures it has been at its most volatile since the June 2016 Brexit referendum.
In Wednesday evening’s ballot May gave lawmakers in her party a free vote - meaning they do not have to vote according to party lines - and a large majority voted against a no-deal Brexit - which most economists say would cause significant harm to the economy.
Wednesday’s vote means that an array of possibilities open up including a second referendum or general elections - keeping general market volatility levels on the pound high.
Most economists anticipate that Brexit will be delayed by a few months with the two sides eventually agreeing a free-trade deal, according to a Reuters poll.
The barrage of news this week over the progress of Brexit negotiations has sent derivative markets into a tailspin.
Overnight gauges of expected moves in the pound spiked on Tuesday to its highest levels last seen immediately after the Brexit referendum vote in June 2016.
However, gauges of expected volatility in the British currency showed tentative signs of settling on Wednesday.
One-month risk reversals on the pound, a gauge of investor expectations for a currency’s direction used to hedge against expected moves, traded near their lowest levels since December 2018, indicating investors remained cautious in their outlook.
Graphic: Sterling up, vols down before parliament Brexit vote (tmsnrt.rs/2O2WJP5)
Reporting by Saikat Chatterjee; Graphic by Sujata Rao; Editing by Angus MacSwan