Market volatility expected as odds of no-deal Brexit tighten

Sterling and European markets are likely to succumb to another wave of volatility this week as the odds of a no-deal Brexit have tightened after UK prime minister Boris Johnson’s bid to pass his European Union withdrawal agreement in parliament on Saturday was scuppered, according to traders and analysts.

"Markets are likely to remain nervous over the next few days," said Ronan Dunphy, an economist with Investec Ireland, even though he still sees the prospect of the UK crashing out of the EU at the end of October as "remote".

“If parliament ultimately approves Johnson’s agreement this week, it would be positive for sentiment, but the uncertainty in the meantime is likely to weigh with markets reacting to events and the likelihood of parliament passing a meaningful vote on the deal.”

Mr Johnson has vowed to press on this week to secure House of Commons approval for his withdrawal accord, which was struck with the EU on Thursday, after members of parliament voted on Saturday by 322 to 306 in favour of a motion tabled by rebel Tory MP Oliver Letwin, withholding their approval for now.

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Extension

While Mr Johnson adhered on Saturday evening to a law passed last month forcing him to seek an extension to the 31st Brexit deadline from the EU, he did not sign the letter and accompanied it with another letter he argued that granting extra time would be “deeply corrosive”.

Senior UK cabinet minister Michael Gove, who is in charge of planning for a no-deal Brexit, said on Sunday that the risk of such a scenario had increased and that the government's contingency plan for this – known as Operation Yellowhammer – was being "triggered".

“Over the last 10 days the pound has rallied 5 per cent against the euro as hopes of a Brexit deal have increased. While currency markets will be relieved that no-deal has been avoided for now, the probability of a UK general election has increased and historically the pound has come under pressure during these periods,” said Lee Evans, head of foreign exchange trading and strategy at Bank of Ireland’s markets and treasury division.

“Sterling is likely to weaken as markets open; however, with a vote on Boris Johnson’s deal still likely this week, the two-sided risks for the pound remain as the Brexit story rumbles on.”

The Iseq stock market index in Dublin has surged by 5.7 per cent, led by banks and house builders, since Taoiseach Leo Varadkar and Mr Johnson emerged from a meeting in the grounds of a Merseyside country manor on October 10th to declare they saw "a pathway" to an accord.

Traders expect the Brexit-sensitive index to turn choppy over the coming days.