Fragile Calm Breaks as Johnson Threatens No-Deal: Trading Brexit

(Bloomberg) -- Fears that Britain’s break up with the European Union could still turn ugly suddenly returned to markets this week, driving up pound volatility and rate-cut bets.

The Brexit boogeyman reappeared days after a landslide victory for the Tory party as Prime Minister Boris Johnson renewed calls for a hard deadline of December 2020 to exit the common market -- with or without a deal preserving trade ties. The no-extension period is going into Brexit legislation for a Parliamentary vote Friday.

Traders ratcheted overnight volatility on sterling back up to October levels, when it wasn’t clear that a December election would deliver a fat majority in parliament for Johnson to see Brexit through.

The premium investors to pay to guard against the pound falling versus rising -- measured in volatility -- has advanced as investors weighed the possibility of a disruptive break between the U.K. and its largest trading partner. The gauge widened for two days, then eased a bit on Thursday. Sabine Weyand, director general for trade at the European Commission, warned of a “cliff-edge situation” if the U.K. stuck to a hard deadline for negotiations.

Money markets now see an 65% probability of Britain’s central bank cutting interest rates by 25 basis points in December 2020, up from about 30% on Friday, reprising levels at the beginning of this month sparked by a flight to safety on fears that a trade deal between the U.S. and China was on ice.

The Bank of England voted 7-2 to hold rates at 0.75%, with officials saying Thursday it was too early to tell whether the clearer Brexit will improve sentiment.

--With assistance from James Hirai, Vassilis Karamanis and Matthew Parkin.

To contact the reporter on this story: Todd White in Madrid at twhite2@bloomberg.net

To contact the editors responsible for this story: Sam Potter at spotter33@bloomberg.net, Cecile Gutscher, Sid Verma

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