The pound slumped to its weakest level in 20 months against the dollar on Monday as British Prime Minister Theresa May postponed a parliamentary vote on her Brexit deal, rekindling doubts about the United Kingdom's departure from the European Union in March.
Safe-haven bids stoked a comeback for the greenback which suffered its steepest weekly drop versus a basket of currencies in three months last week.
The dollar’s snapback was limited as traders reduced their expectations that the Federal Reserve might pause its interest rate hikes sooner than previously thought.
“Pound slowly fell in the past two years, fluctuating based on erroneous hopes of resolution, but it’s clear that leaving the single market and its benefits, in any way, is not a prosperous route,” said Juan Perez, senior currency trader at Tempus Inc in Washington.
The UK parliamentary vote for May’s Brexit proposal was set for Tuesday. The postponed vote left the door open to a disorderly Brexit with no deal, a last-minute deal or another EU referendum.
European Council President Donald Tusk said the Brexit Brussels and May agreed on are not up for renegotiation. The sterling was down 1.41 percent at $1.2546 after touching $1.2507, which was the lowest since April 2017.
The euro hit a three-month peak versus the pound at 90.875 pence. It was last up 1.06 percent at 90.475 pence. The single currency’s gains were limited by the violent protests in France against President Emmanuel Macron’s economic reform.
The euro was down 0.23 percent at $1.13535 after hitting a near 2-1/2-week high at $1.14425 in Asian trading. The greenback strengthened versus a basket of currencies that includes the euro as traders trimmed their earlier bets on a less aggressive Federal Reserve.
Widening interest rate differentials between the United States and the rest of the world, driven by a confident US Federal Reserve, has fuelled an unlikely dollar rally this year.
However, weak data in recent weeks has clouded the currency’s prospects for next year. “You are getting a bit of reprieve from a very dovish view for the Fed in the next 12 months,” said Chuck Tomes, associate portfolio manager at Manulife Asset Management in Boston.
The futures market implied traders expected the US central bank to raise key lending rates by a quarter point at its Dec. 18-19 meeting to 2.25-2.50 per cent, marking its fourth rate hike in 2018.
They now saw no more than one rate increase in 2019, down from two a month ago, according to CME Group’s FedWatch program.
An index that tracks the dollar versus a group of six currencies was up 0.74 percent at 97.232 after falling 0.78 per cent last week.