December 11, 2018 / 9:14 AM / 8 months ago

Sterling to 20-month lows on reports of no-confidence vote in May

LONDON (Reuters) - Sterling fell to 20-month lows on Tuesday in the wake of reports that colleagues of Prime Minister Theresa May believed they had sufficient numbers to mount a no-confidence vote in her leadership.

FILE PHOTO: British five pound banknotes are seen in this picture illustration taken November 14, 2017. REUTERS/ Benoit Tessier/Illustration/File Photo

The BBC, Daily Mirror and Buzzfeed reported late Tuesday, citing various sources, that lawmakers in May’s Conservative Party had the 48 letters needed to trigger a no-confidence vote as soon as Wednesday.

Against the sterling, the euro rose 0.32 percent to 90.685 pence EURGBP=D3, holding below a 3-1/2 month high of 90.875 pence set on Monday.

The pound GBP=D3 was 0.63 percent lower at $1.2481. It hit $1.2481 in late trading, which was the lowest since April 2017.

Sterling weakness on Tuesday followed May’s decision on Monday to delay a parliamentary vote on her Brexit deal. That spooked investors and sent the pound tumbling 2-1/2 cents to its lowest level since April 2017.

It traded as high as $1.2638 earlier on Tuesday, benefiting from dollar initial weakness.

“It’s clear that Brexit will be a significant overhang for sometime. We see that in flows and valuations. The events of the last few days show you why there’s caution,” said Richard Turnill, BlackRock’s global chief investment strategist.

“We still think a no deal (Brexit) is a very low probability. But the uncertainty will persist for some time.”

May on Tuesday met with European leaders, seeking support for changes to her Brexit deal in a last-ditch bid to save it.

The European Union has ruled out renegotiating the divorce treaty. May’s spokeswoman said the British parliament would vote on a deal before Jan. 21. If there was no satisfactory deal by then, parliament would be given a debate on the issue.

“It is impossible to say whether this is as bad as it gets for sterling, as that depends on what May gets back from Brussels and the odds of that getting through parliament,” said John Marley, a consultant at FX risk manager SmartCurrencyBusiness.

GRAPHIC - Euro, sterling since Brexit referendum : tmsnrt.rs/2ytup0V

PAY BOOST

Official data showed on Tuesday that British workers received their biggest pay rises in a decade in the three months to October.

The higher-than-expected pay growth was a further sign the UK labour market is shrugging off Brexit uncertainty, and the Bank of England will be keeping a close eye on whether wage pressures feed through to higher inflation.

However, with Brexit dominating trading, the pound was unmoved.

Amid the constant political wrangling, spot prices are proving very difficult for investors to predict. Buying sterling volatility GBP1WO=R has therefore remained a favourite trade.

One-week volatility is close to its highest levels this year, while the spread of one-month sterling volatility over euro volatility is the biggest since the 2016 Brexit referendum and the second widest since the euro was launched 20 years ago.

In another sign of how big Monday’s sell-off was in currency markets, a trade-weighted value of the pound GBPTWI=BOEL against rivals suffered its biggest daily losses since the Brexit referendum vote in June 2016.

Additional reporting by Helen Reid and Josephine Mason in LONDON; Richard Leong in NEW YORK; Editing by Andrew Roche and Lisa Shumaker

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