Brexit delay: Pound climbs as Article 50 extension looks more likely

Traders warned that while sterling has strengthened in wake of reports Brexit will be delayed, long-term volatility risks remain

The pound surged to monthly highs on Tuesday off the back of optimism that Brexit will be delayed and a deal secured.

Sterling was up 0.81 per cent against the dollar at $1.3203 and rose 0.77 per cent against the euro to hit €1.1620.

The upward move came after reports Theresa May is planning to delay Brexit, with the extension of Article 50 put on the table as an option in the House of Commons on Tuesday.

Meanwhile, Jeremy Corbyn made a dramatic U-turn on Monday and said Labour would back a second referendum.

Michael Brown, senior analyst at Caxton FX, said: “The pound’s gains are a result of markets beginning to price in an extension to the Article 50 negotiating period.

“Though a delay is simply pushing back the exit date, and doesn’t solve anything itself, markets are taking solace in the fact that such a move would delay a cliff-edge no-deal scenario. Confirmation of such a delay would likely strengthen the pound further in the near term, though political headwinds remain.”

Meanwhile, Lukman Otunuga, research analyst at FXTM, warned “a major risk accompanied by extending Article 50 is that Britain will find itself trapped in a Brexit limbo”.

“While the pound has scope to extend gains on Brexit delay expectations, the medium to longer term outlook remains blurred by a thick cloud of uncertainty,” he added.

“With the odds of a second referendum also rising after Labour leader Jeremy Corbyn made a U-turn to back the move, another question floating in the air is whether there will even be a Brexit.

“With just over one month left until the UK is scheduled to leave the European Union, we expect the pound to display extreme levels of sensitivity and volatility to Brexit headlines.”