Sterling surges against dollar

Sterling edged higher against a broadly struggling dollar on Monday as traders awaited the outcome of a vote in British Parliament on Prime Minister Boris Johnson's demand for a general election. A House of Commons vote is due around 1900 GMT, with lawmakers deciding on whether to approve Johnson's request in return for more time to adopt his Brexit deal.

Johnson needs the support of two thirds of parliament's 650 members to trigger a new election. European Council President Donald Tusk said that the 27 countries that will remain in the EU after Britain departs have agreed to accept London's request for a Brexit extension until Jan. 31. "The market reaction is fairly muted as the extension was widely expected," said Marija Veitmane, a senior strategist for multi-asset class research at State Street Global Markets, adding that the path to Brexit resolution remains fraught with political challenges.

Johnson, who pledged to deliver Brexit on Oct. 31 "do or die", was forced to request a delay after parliament rejected the sequencing of ratification of his exit agreement. Given that the three-month Brexit extension has not yet been formalised, lawmakers are unlikely to agree on Monday to a snap election, with another vote possibly later in the week or next week, said Athanasios Vamvakidis, global head of G10 FX strategy at Bank of America Merrill Lynch.

Commenting on sterling's muted reaction, Vamvakidis said: "The risk for a no-deal Brexit has been reduced substantially, but the market has not yet priced in a deal scenario." The pound was trading a touch higher at $1.2855 and at 86.28 pence against the euro. The pound could rise "well above" $1.30, and possibly up to $1.35, if the British parliament approves the Brexit divorce deal, Vamvakidis said.

The derivatives market was also quiet, with three-month sterling implied volatility gauges falling slightly. With the EU agreeing to a third Brexit extension, "one element of certainty is coming back and should support sterling", said Neil Jones, head of European hedge-fund sales at Mizuho, adding that he is suggesting to clients that the pound will trade higher. "For me, the potential certainty ahead is a lot higher than what the market is factoring in," Jones said.

Leveraged funds that bet on the direction of sterling reduced their short positions on the pound in the week to Oct. 22 to $4.16 billion, a four-month low, according to CFTC data on Refinitiv. Still, those levels showed that market participants remained overall negative on sterling compared with April 2018, when speculators were broadly long on the British currency.