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Sterling lower before decisions on Brexit extension and election

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Sterling lower before decisions on Brexit extension and election
Pound Sterling notes and change are seen inside a cash resgister in a coffee shop in Manchester, Britain, September 21, 2018. REUTERS/Phil Noble/Files   -   Copyright  PHIL NOBLE(Reuters)
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By Elizabeth Howcroft

LONDON (Reuters) – Sterling edged lower on Friday as investors waited for a European Union decision on a Brexit extension after British Prime Minister Boris Johnson called for a December general election.

EU envoys will discuss the length of another delay to Brexit at a meeting on Friday. An EU official said the choice was between three months and a “two-tier” lag but warned that a decision might not come just yet.

The pound was down as much as 0.2% against the dollar as trading opened on Friday and was last trading at $1.2845 <GBP=D3>. It saw similar losses against the euro, at 86.545 pence <EURGBP=D3>.

Sterling has now erased its gains for the week as hopes the British parliament would pass Johnson’s Brexit deal turned into more political uncertainty.

The British currency is unlikely to move much if the EU grants an extension because markets have already priced that in as the most likely outcome, said Thu Lan Nguyen, FX strategist at Commerzbank.

“I think pound weakness will remain muted because the chances are still quite high that EU will grant an extension – it always has,” she said.

The pound dropped to its low for the week on Thursday after Johnson called for a general election on Dec. 12. It settled just under half a percent lower on the day against the dollar.

The possibility of an election will be a factor in the EU’s decision on extending the Oct. 31 deadline.

Labour leader Jeremy Corbyn said that he would only support an election if no-deal was off the table. He said he would decide whether to vote for an election after the EU made its decision on Friday.

Commerzbank’s Nguyen pointed out that there’s a risk of “running round in circles” — the EU may want to wait until the UK confirms its election, but Labour will block an election until the EU decides on an extension.

Although uncertainty about Brexit has hurt the pound, the currency has been bolstered in October as the chances of a no-deal exit have been all but eliminated. It is up 5% against the dollar this month.

“Would be cautious over chasing $GBP higher now. Shorts won’t re-enter unless deal efforts completely collapse (seems unlikely). But topside risks fading,” said Viraj Patel, a strategist at Arkera.

Sterling-dollar implied volatility – expectations of future price swings – on a one-month maturity were down to 9.25% on Friday, the lowest in five-weeks <GBP1MO=FN>.

(Reporting by Elizabeth Howcroft, editing by Larry King)

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