By Julien Ponthus and Olga Cotaga
LONDON (Reuters) – Britain’s latest Brexit stumble is likely to prompt a pullback in sterling’s recent rally when trading resumes later on Sunday, though strategists say rising confidence that a disorderly European Union exit will be avoided should limit any sell-off.
The pound closed just below the $1.30 mark on Friday, right at the peak of a 6.5% surge it has enjoyed since British Prime Minister Boris Johnson first made a breakthrough on striking an EU divorce deal on Oct. 10.
The currency strengthened as Johnson agreed a revised deal at an EU summit on Thursday, but parliament frustrated his plans on Saturday by withholding its approval until formal ratification legislation is passed.
While the British government still insists the country will leave the bloc come Oct. 31, the consensus view is that a no-deal Brexit by default will be avoided.
For Timothy Graf, strategist at U.S. asset manager State Street (NYSE:), last week’s rally in the pound may have been “a little bit overbought”, but Saturday’s vote in the House of Commons implies a no-deal departure is now unlikely.
“It’s a positive in the sense that we have avoided the worst outcome”, he said.
Kallum Pickering, a senior economist at Berenberg, made a similar case.
“I would not be selling on Monday morning on the basis of the news over the weekend,” he said.
DOUSING THE EUPHORIA
For many, Sunday and Monday’s opening trades will merely knock some of the froth off the recent surge as investors await the outcome of a possible vote on the deal itself on Monday.
“Clearly, for sterling any setback is negative in the short term, but don’t write off Johnson just yet,” cautioned Societe Generale’s chief UK economist Brian Hilliard.
On Saturday Deutsche Bank (DE:) strategist Oliver Harvey said his bank retained a “constructive outlook on the UK” and a positive view on the pound.
“The only remaining tail risk is that EU27 leaders do not agree to an extension (which seems unlikely) or that in a subsequent election the no-deal Brexit Party performs sufficiently strongly to enter government,” Harvey said.
Peter Lowman, chief investment officer at Investment Quorum, said there is a possibility that the opening of the markets could prove somewhat uneventful, given the lack of visibility.
Investors who built positions on the pound and UK stocks expecting a favourable outcome had little reason to change their minds.
But for David Page, a senior economist at Axa IM, there has been a change in sentiment since Friday evening.
“Financial markets closed last week on an optimistic tone with hopes of resolution and certainty to the Brexit outlook. These hopes have been dashed,” he said.
“Gains in sterling, mid-cap equities and UK gilt yields look likely to face an early retracement over the coming week.”
In London, investment banks were ready to implement special measures to ensure that they and their clients could tackle a potential volatility surge on Sunday evening, with additional staff on trading desks.
“We will have the resources in place to provide a 24-hour service to our clients across all the key markets to which we usually provide access,” an HSBC spokesman said.
Russell Lascala, head of foreign exchange trading at Deutsche Bank, said his team wasn’t expecting a dramatic session of trading and that plans to call in 20 additional people had been abandoned.
“I don’t think we’re going to see much when the market opens later on Sunday,” he said.
A spokeswoman at Citi said on Friday that the bank would be hosting a conference call with former foreign minister William Hague to help its clients to analyse the country’s political situation.
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