LONDON (Reuters) - Sterling rallied on Friday, helped by a weaker euro and after European Union leaders gave UK Prime Minister Theresa May a two-week reprieve to decide how Britain will leave the European Union.
Disappointing economic survey results in both the euro zone and the United States raised volatility across currency markets on Friday and added to the pound’s gains.
The biggest loser was the euro as investors grew increasingly concerned about the outlook for the global economy.
Sterling had plunged on Thursday in its biggest one-day fall of 2019 as fears mounted that Britain would crash out of the EU on March 29 without a deal.
The EU has said Britain can have a short delay to Brexit, as requested by May, but she must first win parliamentary approval for her withdrawal deal from the bloc.
May has already lost two attempts to secure parliamentary support and with the odds stacked against her for another vote next week, the risk of a no-deal Brexit has risen sharply.
EU leaders have described the two-week extension as a last chance for Britain to secure an orderly Brexit.
“Last night’s move by the EUCO (European Commission) has lowered the immediacy of hard Brexit risk next week,” Nomura FX strategist Jordan Rochester said. “But no deal can still happen if Theresa May were to wish it, either next week or on 12th April.”
The pound was up 0.6 percent at $1.3188, while its gains versus the euro were as high as 1.5 percent to 85.49 pence. The gain was largely on the back of weakness in the single currency following disappointing data out of Germany.
Franklin Templeton said on Friday there was a 30 percent probability of Britain crashing out of the EU without a deal - higher than most bank forecasts of around 10 to 20 percent. On the Betfair exchange, no-deal Brexit odds have dived under 5 percent.
“We’d expect sterling to remain range-bound, with the latest headlines dictating its movement. It should be a similar story for UK government bonds. We’d expect gilts to remain quite well bid until we get more certainty,” said Franklin Templeton’s head of European fixed income, David Zahn.
(Graphic: Sterling vs U.S. dollar - tmsnrt.rs/2OiyHzK)
Currency derivative markets signalled a growing caution for the pound, with one-month risk reversals on sterling versus the euro and the dollar plunging to multi-month highs.
An indicator of how bearish or bullish investors are on the outlook of the currency, so-called risk reversals signal that short-term negative bets on the pound are piling up rapidly despite the broader calm in the spot markets.
One-month risk reversals on the pound versus the euro plunged to their lowest levels since mid-2017. Against the dollar, bearish bets grew to their highest levels since September 2017, according to Refinitiv data.
Additional reporting by Sujata Rao; Editing by Raissa Kasolowsky and Jon Boyle