Sterling edged down on Friday as the European Union failed to set a date for the United Kingdom‘s departure from the bloc while the UK Parliament squabbled over Prime Minister Boris Johnson‘s call for an election to break the deadlock.
EU ambassadors agreed in principle to a delay beyond the October 31 deadline, but will not decide the length of the extension until Monday or Tuesday, an official said.
The pound fell slightly on the news and by 11:30 GMT it was down 0.25 percent against the dollar at $1.2823, though it held above the one-week low of $1.2790 hit on Thursday after Johnson called for an election.
Versus the euro, it slipped 0.4 percent at 86.66 pence.
“It seems like [there is] this weird feedback loop of uncertainty from the UK Parliament leading to the EU not making a decision, leading to the uncertainty in the UK Parliament,” said Jordan Rochester, FX strategist at Nomura.
Sterling is down 1.3 percent so far this week, ceding half the gains made last week when it rallied the most in two years. It is still up five percent compared to the dollar this month as risks of a no-deal Brexit have tumbled.
Johnson’s spokesman said the government would push ahead with Brexit if legislators did not agree to an election. Opposition Labour Party leader Jeremy Corbyn says he will only support an election if a no-deal Brexit is taken off the table.
Meanwhile, sterling’s upside should be limited.
Thu Lan Nguyen, FX strategist at Germany‘s Commerzbank, noted the risk of “running round in circles”.
“We will see more volatility if we have more elections in December,” she said. “As soon as the date’s set and decided I would expect implied volatility in the one- to two-month horizon to rise again.”
Sterling-dollar implied volatility – expectations of future price swings – on a one-month maturity were down to 9.15 percent on Friday, the lowest in five weeks.
But the three-month contract inched to a four-day high at 10.2 percent, as election jitters and fears of prolonged Brexit uncertainty crept in.