Sterling firms before Parliament's Brexit amendment votes

LONDON — Sterling zipped higher on Tuesday, reversing early losses after the speaker of the British Parliament chose amendments to be voted on by lawmakers, including one that would effectively take a no-deal Brexit off the table.

The currency remains well off recent
multimonth peaks however, and volatility in derivatives market was elevated, reflecting markets' nervousness about the likely outcome of the votes.

Parliament was due to debate and vote from 19:00 GMT on Prime Minister Theresa May's response to the overwhelming rejection of her Brexit plan earlier this month. 

But markets' main focus is on amendments proposed by lawmakers. The speaker of the House of Commons, John Bercow, has chosen seven to be voted on. 

In particular, markets are focusing on Amendment B, proposed by opposition Labour lawmaker Yvette Cooper, which seeks to shift control of Brexit from May's government to Parliament. If successful, this could give lawmakers who want to block, delay or renegotiate Brexit a legal route to do so.

Amendment G by Dominic Grieve, a pro-EU Conservative, which would give lawmakers a chance to propose their own Brexit debates in Parliament in February and March, will also be voted on.

"I suppose given those amendments have been chosen markets may have discerned that a delay is a step closer," said Neil Mellor, FX strategist at BNY Mellon.

"The prominent amendments that have been chosen are too close to call [the outcome] but if the Cooper and Grieve amendments are carried, that is sterling positive."

Cooper's amendment, which could delay Brexit, is considered likely to pass, especially after a source told Reuters the opposition Labour Party would back it.

Speaker Bercow's announcement sent sterling to a session high of $1.32 — having traded earlier in a $1.3160-$1.3170 range — up 0.2 per cent on the day. But it remains well off two-and-a-half-month highs of $1.3218.

It rallied against the euro too, rising 0.2 per cent to a high of 86.560 pence but held well below Friday's 10-month highs around 86.18 pence.

Unicredit noted the pound had been this year's best-performing major currency so far, rising around 4 per cent to the dollar and euro. On a trade-weighted basis, it is at a two-and-a-hlafmonth high

"The risk that we get a disappointment in tonight's vote is clearly there," Unicredit FX strategist Kathrin Goretzki said, though she noted the vote would not significantly dent optimism that parliament had taken control of the Brexit process to avoid a no-deal scenario.

"We don't expect this to be affected in a negative way in tonight's vote. Any correction will be temporary," she said.

Another amendment selected for a vote, proposed by Conservative lawmaker Graham Brady, calls for the Irish backstop arrangement envisioned by May's Brexit divorce deal to be removed and replaced with "alternative arrangements".

The backstop is an insurance policy designed to avoid customs checks between EU member Ireland and British-ruled Northern Ireland after Brexit. Many in May's party oppose it, fearing it could trap Britain in a permanent customs union. 

May asked lawmakers to support Brady's amendment which, if passed, would show the EU that she can win parliamentary approval for the negotiated withdrawal deal if some changes are made to the Irish backstop plan.

Nervousness was reflected in a rise in implied sterling volatility on options markets, which has fallen steadily since the start of the year. Overnight implied volatility in particular raced to near 23vol (volatility), the highest since January 15, when lawmakers defeated May's Brexit deal.

One-month implied vol rose to its highest in a week-and-a-half at 11.2vol, a day after seeing the biggest one-day rise since November.