The UK currency declined after Theresa May’s revised Brexit plan was rejected by the lawmakers. The Sterling was holding steady in trading but had dropped by 1 per cent against the Euro after the parliament rejected Brexit deal. The pound was holding at $1.3084 on Wednesday morning in Asia. The currency jumped to $1.3138 on Tuesday immediately after the result, before settling back at just below $1.31 to finish the trading day 0.4 per cent lower. But sterling registered heavy losses against the euro on Tuesday, trading more than 1 per cent lower even after the slight advance that followed the parliamentary vote.
The latest blow to the prime minister will throw some insights about the series of parliamentary votes scheduled for later in coming days. The focus would be on whether the UK should exit the EU without a deal, or there will be the possibility of extending the Brexit deadline beyond March 29.
On Thursday, MPs will vote on a possible extension to the EU’s Article 50 to extend for the Brexit negotiations. Presently, the currency traders expect a positive outcome, despite the potential for sterling to decline further against the dollar in the event of the UK crashing out of the EU without a deal in two weeks.
The market still had strong belief that a hard Brexit is not going to happen. There hasn’t been any demand for hard Brexit hedges, which are looking quite cheap at this stage. The pound exchange price had pushed well above its January lowest price of around $1.25 over the past few weeks as investors had bet that the parliament would have no desire for a no-deal Brexit. Sterling climbed to $1.3288 late on Monday.
The derivatives markets show that the investors are bracing for ups and downs in sterling over the next few months, but they are still caught between the likelihood of the pound surging to around $1.50 or plunging to near $1.15.
Options contracts are a way to profit from or hedge against large moves, but the wide range of potential outcomes from the Brexit process is posing a challenge. It is very difficult to price the options right now. It would be good as of now not to get involved with these short-term moves and sit on the sidelines.
Sterling’s volatility over the past day or two had proved to be a mixed blessing for hedge funds, some of them had been positioning it to move higher in recent months as the prospects of a no-deal Brexit appear to have diminished.
Many of the currency funds managers had benefited from the pound’s general move higher this year as they had been long on the pound via options ahead of this week’s events. There is some fear in the market for being short going into an event with a positive outcome. It is hard to see a complete adverse scenario for the pound sterling. As volatility to its price is entirely dependent on the Brexit negotiations.
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