LONDON, August 28 (Reuters) - Sterling dived on Wednesday as concerns rose that the United Kingdom may be headed for a disruptive no-deal Brexit after Prime Minister Boris Johnson moved to restrict parliamentary time before Oct. 31.
The pound fell to a six-day low on Wednesday, holding barely above $1.22 as Britain's Queen Elizabeth gave the nod to Prime Minister Boris Johnson's plan to suspend parliament, leaving lawmakers little time to prevent a no-deal Brexit.
A statement from the official body of advisers to the Queen, known as the Privy Council, confirmed that the British parliament will be prorogued on a day between Sept. 9 and Sept. 12, until Oct. 14.
Sterling plunged earlier as low as $1.2156 and government bond yields fell when Prime Minister Boris Johnson sought to suspend parliament in September, just days after lawmakers return from summer recess. The Queen's Speech to launch new legislation would be scheduled for Oct. 14, he said.
While Johnson denied he was seeking to prevent parliament from obstructing his Brexit plans, the move will curtail the time available to lawmakers who want to prevent Britain from crashing out of the European Union without an exit agreement .
"Today's development brings us firmly into the realms of a constitutional crisis," Derek Halpenny, head of research for global markets at MUFG, said, saying there was an "incredibly narrow window" for parliament to try delay Brexit or organise a no-confidence motion against Johnson.
"No-deal Brexit is looking ever more likely, sterling downside risks will continue to plague the market," Halpenny said, predicting sterling to test and breach its recent $1.2015 low.
Sterling traded 0.6% lower by 1500 GMT and was down 0,4% to the euro at 90.6 pence, having earlier weakened to 91.265 pence, the lowest in nearly a week.
The developments took the edge off a pound rally on Tuesday, when it touched a one-month high on news opposition parties were thrashing out ways to block a hard Brexit.
"For the pound to recover the fall this morning, anti-no- deal MPs will have to get their acts together in the first weeks of September," Jordan Rochester, a strategist at Nomura said, raising the odds of a no-deal Brexit to 44% vs 40% earlier.
Brexit-sensitive easyJet and International Airlines Group , the owner of British Airways, slumped 2% to 3%. Housebuilders such as Persimmon and Taylor Wimpey were down 3-4%.
As investors flocked into safer assets, British 10-year Gilts rose, pushing yields to their lowest in more than a week .
SHORTS WORTH $7 BILLION
Sterling's decline may have been tempered by the fact that investors are already extremely bearish on the British currency - speculators' outstanding short sterling positions amounted to $7.028 billion as of Aug. 20, data from the Commodity Futures Trading Commission showed.
That's close to the levels held two and a half years ago.
Moreover, given Johnson's apparent determination to take Britain out of the EU on Oct. 31, with or without a deal, derivatives markets indicate sterling is more likely to fall than rise in coming months.
Implied sterling-dollar volatility, a gauge of expected price swings, has surged to the highest since January, contrasting with other developed-market currencies, where volatility remains subdued.
Three-month volatility rose above 13 vols, compared to less than 11 vols at the end of July
The pound has lost 4.3% of its value against the dollar this year and looks undervalued by most measures, but investors remain wary of buying it back just yet.
"Sterling is cheap, so we're primed to increase our sterling exposure, but we won't do that until we get some clarity on a no deal or deal," said Rory McPherson, investment director at Psigma Investment Management.
Reaction:
DOMINIC GRIEVE, PRO-EUROPEAN CONSERVATIVE LAWMAKER
"I think (a no-confidence vote) is more likely, because if it is impossible to prevent prorogation, then I think it's going to be very difficult for people like myself to keep confidence in the government, and I could well see why the leader of the opposition might wish to table a motion for a vote of no-confidence."
JAMES CLEVERLY, CHAIRMAN OF THE GOVERNING CONSERVATIVE PARTY
"Or to put it another way: Government to hold a Queen's Speech, just as all new Governments do."
TOM WATSON, DEPUTY LEADER OF THE MAIN OPPOSITION LABOUR PARTY
"We do not have a 'new government'. This action is an utterly scandalous affront to our democracy. We cannot let this happen."
SIMON CLARKE, A JUNIOR FINANCE MINISTER
"In 400 years we haven’t had a session of Parliament that’s lasted as long as this. We need a Queen’s Speech to set out a bold agenda for after we leave the EU - on policing, infrastructure and the NHS."
PHILIP HAMMOND, FORMER FINANCE MINISTER
"It would be a constitutional outrage if Parliament were prevented from holding the government to account at a time of national crisis. Profoundly undemocratic."
LEAVE.EU, PRO-BREXIT CAMPAIGN GROUP
"Boris is set to ask the Queen to suspend Parliament until October 14, paving the way for a new Queen's Speech - and preventing the Brexit-wrecking Remoaners from blocking a WTO Brexit. Finally, a PM who is willing to step up and defend the will of the British people!"
NICOLA STURGEON, SCOTLAND'S FIRST MINISTER
"So it seems that Boris Johnson may actually be about to shut down Parliament to force through a no deal Brexit. Unless MPs come together to stop him next week, today will go down in history as a dark one indeed for UK democracy."
JORDAN ROCHESTER, NOMURA CURRENCY STRATEGIST
"It’s not 'as bad' as proroguing parliament completely but it’s reduced the time MPs had in October to block a no deal. For GBP to recover the fall this morning rebel anti-no deal MPs will have to get their acts together in the first weeks of September. No more delaying."
YVETTE COOPER, SENIOR BACKBENCH LABOUR LAWMAKER
"Boris Johnson is trying to use the Queen to concentrate power in his own hands - this is a deeply dangerous and irresponsible way to govern."
TOM BRAKE, BREXIT SPOKESMAN FOR PRO-EU LIBERAL DEMOCRAT PARTY
"If BBC News are correct @BorisJohnson's just thrown down the gauntlet to Parliamentary democracy. The mother of all Parliaments will not allow him to shut the #PeoplesParliament out of the biggest decision facing our country. His declaration of war will be met with an iron fist."
"For the pound to recover the fall this morning, anti-no deal MPs will have to get their acts together in the first weeks of September," Jordan Rochester, a strategist at Nomura said, raising the odds of a no deal Brexit to 44% vs 40% earlier.
The latest move from Johnson comes a day after lawmakers who are opposed to a no-deal Brexit met to discuss ways they could use parliamentary procedure to force Johnson to seek a delay to Brexit.
Sterling had rallied in recent days on hopes that Britain's opposition parties can stop a no-deal Brexit.
On Tuesday, it hit a one-month high against the dollar and the euro.
Johnson has said the UK is leaving the European Union with or without a deal on Oct. 31, and media have previously reported that he wants to suspend parliament to help force through an exit.