Pound extends recovery amid Brexit drama

LONDON: The pound rebounded further on Wednesday but its gains were capped as Brexit turmoil set the stage for a potential snap UK election next month.

The pound shot back above $1.22 to show an increase of almost one per cent from late on Tuesday. Having dived on Tuesday to $1.1959 — the pound’s weakest level since 1985 except for a 2016 “flash crash” — it has since rallied on rising hopes that Britain will not exit the European Union without a deal.

“Sterling was thrown a lifeline by a parliament determined to avoid a no-deal Brexit,” said analyst Connor Campbell at trading firm Spreadex, but he also injected a note of caution. “The complicating factor here, and the reason that sterling’s gains... are not even greater, is the potential for a general election.” Many economists argue that a no-deal departure could hammer the British economy, which risks already falling into recession this quarter.

The purchasing managers’ index (PMI) for all UK sectors dropped to 49.7 from 50.3 in July, according to IHS Markit, which compiles the data. A figure below 50 indicates contraction.

“The PMI surveys are so far indicating a 0.1-percent contraction of GDP in the third quarter,” which would mean Britain had fallen into recession, noted Chris Williamson, chief business economist at IHS Markit.