Pound gains on hints of support for PM May's Brexit deal

LONDON: Sterling bounced against the euro on Tuesday after two eurosceptic lawmakers indicated they might agree to support British Prime Minister Theresa May's EU withdrawal deal rather than risk the UK parliament cancelling Brexit.

The comments follow parliament's move to take control of the Brexit process, raising expectations that lawmakers can end an impasse on Britain's European Union exit, with the possibility of a longer Brexit delay or a second referendum.

Lawmakers will now vote on Wednesday on a range of options, giving parliament a chance to indicate whether it can agree on a deal with closer ties to Brussels -- and then try to push the government in that direction.

Jacob Rees-Mogg, leader of a eurosceptic faction of May's Conservative Party, hinted that he could scale back opposition to May's deal, which has twice received crushing rejections from lawmakers. Passing the deal would rule out the risk of leaving the EU without any transition arrangements.

Another Conservative lawmaker, Michael Fabricant, said he had arrived at the same conclusion as Rees-Mogg.

"A no-deal exit does look like quite a low probability outcome, but beyond that there's a wide range of potential paths we could take," said Paul O'Connor, head of the multi-asset team at Janus Henderson Investors.

"The difficult thing for the market is that most options that seem quite soft from an economic perspective do seem to come with a lot of political risk."

The pound, which had languished mostly in negative territory below $1.32, rose as high as $1.3261 after Rees-Mogg's comments but then eased to $1.3228, up 0.2 percent on the day. Its moves were also tempered by a modest firming of the dollar.

Against the euro, sterling gained 0.5 percent to 85.35 pence , having touched one-week highs of 85.19 pence.

"Comments by Jacob Rees-Mogg show he is formally acknowledging he may accept May's deal," MUFG strategist Lee Hardman said. "This increases the likelihood that May's deal could pass."

But Hardman added: "His support by itself can't tip the balance in favour of the deal passing ... The numbers still don't stack up."

May has also emphasised that she will not implement any Brexit proposal that breaks her pledge of a clean break with the EU. That means she could call an election, an outcome also favoured by the opposition Labour Party.

Bookmaker Ladbrokes has cut the odds of a June election to 7/2, compared with 6/1 before Monday's vote in parliament.

A source within Northern Ireland's DUP, the party that props up May's government, was quoted by Sky News as saying it preferred a long delay and change of leadership rather than accept the deal. It later said its position was unchanged.

Scotiabank analysts said that, for sterling, it was "premature to celebrate".

"The prospect of a soft Brexit (or a lengthy delay) ... has swayed some reluctant Tory MPs to back May's plan, but it remains to be seen whether May's deal actually gets another vote in parliament or whether other eurosceptic Tories - and, more particularly, Norther Ireland's DUP - are of the same mind," they added.

VOLATILE

The uncertainty drove up demand for protection against sterling swings.

Implied volatility -- a gauge of expected swings in the currency -- eased a touch, however, though the one-month contract, encompassing the crucial April 12 new date of Brexit, is close to 3-1/2 month highs hit on Monday.

Late on Monday the premium for options that protect against sterling losses over gains against the dollar -- risk reversals -- touched their highest since just after the 2016 Brexit referendum.

Meanwhile, data highlighted the toll the prolonged uncertainty is taking on the British economy, with banking industry group UK Finance reporting mortgage approvals at the lowest level in almost six years.

The run of weak UK data, together with a general lurch towards dovishness by the U.S. Federal Reserve and other central banks, has prompted money markets to virtually price out any chance of a Bank of England interest rate rise in 2019, another factor likely to pressure sterling.