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Europe, Forex

Sterling bounces as Labour prepares bid to avert no-deal Brexit

* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

By Olga Cotaga

LONDON, Aug 15 (Reuters) – Sterling rose on Thursday to the highest in more than a week, supported by news that the opposition Labour Party was mounting a bid to bring down Prime Minister Boris Johnson and stop him taking Britain out of the EU without a deal.

The currency also was lifted by better-than-expected retail sales, which came on the heels of Wednesday’s higher inflation numbers that raised hopes the economy might be in better shape than previously thought.

Labour said it would call a vote of no-confidence in Johnson’s government as soon as it believes it can win it and would form a temporary government under leader Jeremy Corbyn to delay Brexit.

While derivatives inducate market players may be trimming back some short sterling positions, the currency’s prospects remain clouded by the risk of Britain exiting the European Union without a divorce agreement at the end of October.

“The market is not 100% convinced a no-confidence vote will work,” said Jordan Rochester, a currency strategist at Nomura.

The risks, alongside fears of a global economic recession, drove yields on British government bond yields to new lows, with the bond yield curve between two-year and 10-year rates remaining inverted — a possible warning of economic recession.

This means short-dated Gilts pay a higher yield than their long-dated counterparts. Thirty-year yields fell below 1% and the 10-year yields were at record low around 0.4% .

By 1530 GMT, the pound was 0.5% higher at $1.2136, having briefly touched a high of $1.2150. However it remains not far from the 31-month low of $1.2015 it reached on Monday.

Analysts said $1.20 was acting as a floor for the pound but the level could be tested if worries of a no-deal Brexit build up again. Investors barely hold any sterling options with strikes below $1.20, according to Refinitiv data, an indication that there would be few buyers for sterling if it falls below this level.

Against the euro, the pound rose by 0.8% at 91.7 pence, standing well off recent 10-year lows of 93.26 pence.

The cost of protection against unexpected moves in the currency, seen in the three-month options pricing, eased a bit off seven-month highs. Three-month risk reversals, which encapsulate the Brexit deadline, paint a similar picture .

(Reporting by Olga Cotaga; Editing by Alison Williams)


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