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Pound Surges, U.K. Stocks Fall as May Seen Delaying Exit From EU

The pound surged to the strongest level in almost two years versus the euro as investors bet that Brexit will be delayed, bringing alive the possibility of a second referendum.

U.K. government bonds and the FTSE 100 Index slipped as Prime Minister Theresa May is set to address Parliament on the next steps in the Brexit process following reports she is considering a deadline extension. The opposition Labour party, meanwhile, came out in favor of a second vote on whether the U.K. should leave the European Union.

“There is excitement that a second referendum has become more likely which would open the possibility of canceling Brexit,” said Lee Hardman, an analyst at MUFG. “We still think it is unlikely but we are just seeing initial market response which could be pared back over time.”

Sterling jumped almost 1 percent to 85.88 pence per euro, the strongest level since May 2017, before paring the gain to about 0.7 percent. Against the dollar, it climbed as much as 1.1 percent to $1.3238, the highest since October. The yield on U.K. 10-year bonds rose three basis points to 1.21 percent. The FTSE 100 Index of shares was down 1.1 percent.

Pound’s Win Is U.K. Stocks’ Loss on Reduced No-Deal Brexit Risk

The U.K. currency was further boosted as Bank of England Governor Mark Carney and fellow policy makers testified in front of a parliamentary committee. Their comments on inflation suggested the BOE sees price growth staying above target regardless of the Brexit outcome, giving sterling another lift, according to Neil Jones, head of hedge fund sales at Mizuho Bank Ltd.

The pound would rally much more should a second referendum be confirmed, than on a delay to Brexit, according to a survey of strategists conducted by Bloomberg last month. Still, it’s harder to see a way to reach this outcome whereas the EU has already said it would consider allowing the U.K. more time to negotiate.

The prime minister is set to make an announcement to Parliament at 12:30 p.m. With lawmakers due to vote on May’s Brexit motion on Wednesday, she may make a clear promise to avoid no-deal in order to avoid rebellion in her own party.

The market will welcome any development that reduces the risk of a crash exit, but further pound strength could be limited, according to strategists at Royal Bank of Canada and Nomura International Plc.

A Brexit delay is already largely priced into the exchange rate, according to RBC strategist Adam Cole, while Nomura International’s Jordan Rochester said the bank had been hearing from clients that longer-term investors aren’t buying into the rally and likely won’t until May’s deal is done. DM

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