Sterling fell sharply on Monday as Boris Johnson summoned his ministers for an emergency meeting, fuelling expectations the Prime Minister was preparing to call a snap election should lawmakers vote this week to delay Brexit.
Opposition lawmakers are expected to propose legislation on Tuesday – the first day back after the summer recess – to force the government to postpone Brexit beyond the Oct. 31 deadline, which Mr. Johnson has vowed to stop from happening.
The Sun newspaper reported that Mr. Johnson could call an election as early as Wednesday, and cited a source close to him saying he wanted the poll to be held before the European Council summit on Oct. 17 and 18.
Sterling dropped 1 per cent to as low as US$1.2037 – not far from its more than two-year low of US$1.2015 touched in August – as talk of an imminent election mounted. Against the euro, it declined as much as 0.7 per cent to 91.010 pence.
“The Prime Minister is willing to resist all attempts to prevent a no-deal Brexit …” said Kit Juckes, currency strategist at Société Générale. “A no-deal Brexit is partly, but not wholly, priced in,” he added.
Sterling traders are bracing for the battle for Brexit to enter the endgame this week, but the range of possible outcomes – from an election to a no-deal Brexit to another delay – is vast.
Opposition lawmakers, and possibly ruling-party rebels, could seek to either change the law, or the government, in their drive to block what they say would be an economically damaging no-deal Brexit. Many want the government to ask the EU for a delay to the Oct. 31 Brexit deadline.
Mr. Johnson has threatened to expel any rebel lawmakers from his Conservative Party if they try to vote to prevent a no-deal exit.
According to the latest positioning data, speculators cut their short positions against the pound, but – at US$6.8 billion – the size of the bet against sterling remains near its biggest since 2017, underscoring international investors’ deep unease with the current political uncertainty in Britain.
Traders are expecting much more volatility in sterling in the coming months, with implied volatility gauges at or near their highest levels of 2019.
Last week, Mr. Johnson’s government announced that Parliament would be suspended for around a month in what critics called an attempt to squeeze the time lawmakers had left to try to stop a no-deal Brexit.
“If GBP was looking remarkably resilient to U.K. political news at the end of last week, its nerve has given way this morning. The pound has fallen sharply in European hours ahead of what promises to be a week full of twists and turns in Westminster,” Rabobank said in a research note.
Separately, a widely watched survey on Monday showed that British manufacturing contracted last month at the fastest rate in seven years, adding to worries about a significant downturn in the British economy.
The August Purchasing Managers Index for Britain’s manufacturing sector came in at 47.4, against a forecast of 48.4 in a Reuters poll of economists. An already-weak pound was little moved as Brexit dominated trading.