Sterling gains on belief UK will delay Brexit following likely defeat for May in Tuesday's vote

A boost for sterling as rumours swirled that a divided UK government would opt to stay longer in the EU to help it strike a deal, points to the upside for the currency, traders and economists have said.

A London Evening Standard report saying UK cabinet ministers were preparing to delay the Brexit process, or Article 50, helped boost the currency, as Tuesday's parliamentary vote on Theresa May's transition deal draws closer.

File photo

The London newspaper is edited by George Osborne, the former chancellor of the exchequer.

David Lamb, head of dealing at Fexco, said that the gains for the currency pointed the way for sterling even though Ms May was likely to be heading for a defeat on Tuesday.

There have been indications for some time that Ms May will fail to get the vote on her transition deal through, and that the Article 50 process for Britain to negotiate its departure from the EU will be extended, he said.

The gains for sterling give "a flavour of what markets will be happy with", Mr Lamb said.

He said that sterling would probably weaken after a defeat on Tuesday but with "the caveat" that the UK government would then reluctantly extend the Article 50 period providing "a bit of relief" and further gains for sterling.

Philip O'Sullivan, chief economist at Investec Ireland, said the events of recent days again showed how much sterling had been driven by the politics of Brexit since the UK summer 2016 referendum.

For Irish companies, a sharp weakening of sterling can erode the profit margins in selling goods and services into Britain.

The fact that a majority of MPs oppose a no-deal Brexit has helped hold up sterling, Mr O'Sullivan said.

Following the London Evening Standard report, sterling rose almost 1% at one stage on Friday against the euro to trade at 89.3 pence.

It also rose against the dollar, to $1.285.

Capital Economics in London said there was now "more upside than downside risk for sterling" and an evens chance that Article 50 would be extended.

Sterling’s recent resilience following a number of defeats over Brexit in parliament for the government suggests that a lot of bad news has already been discounted. Arguably, the only uncertainty over Tuesday’s parliamentary vote on May’s Brexit deal is the size of the government’s defeat," the economics firm said.

"Given the wildly different possible Brexit outcomes, we judge it best to focus on three scenarios: Brexit with May’s deal, of which we think the probability has fallen to 25%; Brexit with no deal, of which we think the probability has risen to 25%; and some form of 'fudge and delay' involving an extension of Article 50, to which we assign a probability of 50%," it said.

Chris Beauchamp, chief market analyst at online trader IG, said that extending Article 50 was now "vital" for the UK.

"As the UK hurtles towards Tuesday’s meaningful vote, the signs of a shift in position become clearer. Time is fast running out, but with so much still to be done an extension to Article 50 becomes vital," Mr Beauchamp said.

He said that sterling was trading against the dollar "as if an extension (to Article 50) is very much on the cards, underscoring the point that markets would still very much prefer to forget the whole thing ever happened in the first place".

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