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Pound rebounds as May agrees to let lawmakers debate Brexit plan

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by October 12, 2016 General

UK Prime Minister Theresa May accepted that Parliament should be allowed to vote on her plan for taking Britain out of the European Union. — Reuters picUK Prime Minister Theresa May accepted that Parliament should be allowed to vote on her plan for taking Britain out of the European Union. — Reuters picLONDON, Oct 12 — The pound surged against the dollar, heading for the biggest gain in almost two months, after UK Prime Minister Theresa May accepted that Parliament should be allowed to vote on her plan for taking Britain out of the European Union.

Sterling climbed at least 0.7 per cent against all its 31 major peers. The move by the British prime minister eased investor concerns that May would be taking a gung-ho approach to the discussions, even as she asked lawmakers to vote in a way that gives her space to negotiate.

Even after today’s rally, the pound has regained just a fraction of its 4.9 per cent loss versus the dollar over the previous four days. It has dropped 18 per cent since Britain voted in June to leave the European Union and more than 5 per cent this month on mounting concerns over the prime minister’s hardline stance.

“It’s definitely constructive,” said Hans Redeker, Morgan Stanley’s chief global currency strategist in London. “The vote is a major concession that does reduce the room to manoeuvre for Theresa May’s government in the negotiation. That is currently read as positive for sterling.”

The pound climbed 1.2 per cent to US$1.2272 (RM5.16) as of 9.26am in London, set for the biggest gain since August 16. Sterling strengthened 1.4 per cent to 89.92 pence per euro.

Flash crash

Sterling weakened this month amid concern that the government will pursue an exit strategy that will see Britain give up its membership of Europe’s single market to secure greater control of immigration and lawmaking.

Investors were spooked by a 6.1 per cent plunge in two minutes during Asian trading on October 7, cementing the pound’s position as the worst-performing major currency this year. The flash crash was blamed on possible human error and algorithms at a time when liquidity was scarce.

Hedge funds and other large speculators increased bets on a weaker pound versus the dollar to a record last week, according to data provided by the Commodity Futures Trading Commission going back to 1992.

“Given how aggressively short the pound the market was positioned, the prospect of UK parliament at least discussing the downside of a ‘hard Brexit’ has encouraged substantial profit-taking on those positions,” said Sean Callow, a senior strategist at Westpac Banking Corp in Sydney.

Parliament debate

UK lawmakers will debate today a motion from the opposition Labour Party calling for Parliament to be able to “properly scrutinise that plan” before May begins formal talks. She tabled an amendment which effectively accepted the motion.

May made it clear that the vote shouldn’t be used to block Brexit or “undermine the negotiating position of the government.” The concession is unlikely to stop Britain’s departure but it does give lawmakers in favour of maintaining close ties to the 28-nation trade bloc a tool to pressure the premier.

“It’s not a game-changer and we would sell the pound rally within 24 hours,” said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank Ltd. “The hope is that Parliament will have a moderating influence over her cavalier approach so far, but we wouldn’t count on it. Crucially, May has not agreed to let Parliament vote on whether Article 50 will be activated, and that’s what really matters.”

Pessimistic traders

A London court this week will rule whether May can trigger Article 50 of the Lisbon Treaty, which starts an exit, without approval from her fellow lawmakers.

Options traders are more pessimistic on the pound than on any of its developed-market peers. They were paying a 2.3 percentage-point premium for six-month contracts to sell the pound versus the dollar over those to buy, data compiled by Bloomberg show.

“Relief rallies in pound will be limited because of concerns about how tough the negotiations will be, the UK’s widening current account deficit and the prospect for more negative UK interest rates,” said Elias Haddad, a senior currency strategist at Commonwealth Bank of Australia in Sydney. — Bloomberg

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