Brexit: Sterling bounces as Britain’s PM clings to deal

The pound rebounded after a leading eurosceptic minister was reportedly unwilling to follow other Brexiteers in quitting the British government. Prime Minister Theresa May also struck a defiant tone despite strong opposition to her Brexit deal.

The reports that Environment Secretary Michael Gove would stay in the cabinet outweighed others in the British media that a confidence vote in May was likely.

The Sterling suffered its largest one-day drop in two years versus the euro after a wave of ministers opposed to May's Brexit deal with Brussels resigned. Trading on Friday was calmer but the currency remains at the mercy of May's fortunes.

The resignations and May's precarious position left investors panicking that Britain could exit the European Union (EU) without any agreement.

The pound rallied nearly half a percent on Friday as May vowed to stick to her plan and take Britain out of the EU in March.

Sterling traded up 0.3 percent at $1.2811 by 0950 GMT. Versus the euro it traded flat at 88.72 pence.

Analysts said the pound would remain under pressure so long as the risk of further resignations threatened to isolate May yet further and raise the prospect of a leadership challenge.

“The best deal Britain could negotiate might not win the approval of Parliament when they vote on it in early December,” said Marshall Glitter, chief strategist at ACLS Global.

“If that happens, what next? They crash out of the EU with no agreement? More uncertainty and the possibility of an even worse outcome inevitably leads to a sharply lower pound.”

With so much uncertainty --outcomes for Britain now range from a “hard Brexit” to a general election and a second referendum - sterling is increasingly volatile.

One-month implied volatility for the pound overnight rose to as high as 15.1 percent, the highest since July 2016. It was set for its biggest weekly rise since the June 2016 Brexit referendum.

By comparison, one month implied volatility in the Turkish lira, one of the most volatile emerging market currencies, stands at 17.9 percent.

“Sterling volatility has woken up from its 100-year slumber and is likely to remain reactive,” said Ulrich Leuchtmannan, an FX strategist at Commerzbank.

Fears that May's hard-fought Brexit deal could collapse sent British financial markets into a spiral on Thursday. This had not been seen since the sell-off following the referendum.

British stocks sank as did gilt yields.

The darkening outlook for Britain's economy was also reflected in the money markets, where investors no longer expect an interest rate increase by the Bank of England next year.

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