The pound rose against the dollar and euro on Monday, stabilising somewhat after recent falls, as investors waited for a key Brexit vote and weighed up the chance of a no-deal Brexit.
Sterling had its worst week in six months last week, as investors grew more pessimistic about the chances of a Brexit deal being reached before the December 2020 deadline.
Britain threw Brexit trade talks into disarray last week by proposing legislation that would break international law by breaching parts of the Withdrawal Agreement which was signed in January.
Lawmakers are due to debate and vote on the proposed bill, called the Internal Markets Bill, today.
The EU says it cannot trust those who break agreements and that if the bill is not effectively scrapped there will be no trade deal to cover Britain when it leaves the customs union and single market at the end of 2020.
“There has been a decent selloff but I think it has further to go,” said Seema Shah, chief strategist at Principal Global Investors.
“The thinking perhaps is that this (bill) is just a bargaining tool and that it won’t go through parliament - this may be supporting sterling.”
At 1004 GMT, the pound was at $1.2843, up 0.4% on the day but still close to 7-week lows.
Versus the euro, it was up around 0.3%, at 92.24 pence per euro.
One-month implied volatility hit new five-month highs on Monday, indicating increased expectations of future price swings.
Sterling-dollar overnight implied volatility also rose to its highest since early April.
“We expect the pressure on GBP to continue building this week as not enough risk premia is priced into the currency relative to the urgency of the situation,” ING strategists wrote in a note to clients, saying they expect cable to head towards $1.25 this week.
But Goldman Sachs said that the chances of a damaging no-deal Brexit are “meaningfully lower” than the market is implying, making sterling attractive for investors who are willing to look through the short-term volatility.
Speculators’ net bullish position on the pound got bigger in the week to September 8, weekly futures data from the Chicago Mercantile Exchange showed.
MUFG currency analyst Lee Hardman said that expectations of negative interest rates were adding pressure to the pound. The Bank of England will meet on Thursday.
Elsewhere, tighter restrictions on social gatherings in England came into effect on Monday, after coronavirus infections in the UK rose to around 3000 per day.
Reporting by Elizabeth Howcroft; additional reporting by Sujata Rao-Coverley and Dhara Ranasinghe; Editing by Kirsten Donovan