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The pound fell to the lowest level in three weeks as a showdown between U.K. lawmakers over Brexit loomed large.
Sterling was the worst performer among its Group-of-10 peers as Prime Minister Boris Johnson threatened to kick out Conservative lawmakers who vote to block a no-deal Brexit, with his allies even raising the prospect of a snap election.
U.K. lawmakers return from their summer vacation Tuesday and are planning legislation to force Johnson to delay Brexit until Jan. 31 unless he can strike a deal with the European Union by mid-October.
“A snap election would initially be seen as pound negative given the government is expected to win on a no-deal platform,” said Lee Hardman, an analyst at MUFG. “We would expect to see cable initially fall below $1.20, and then toward $1.10 if the government wins a majority and seeks no deal, if the EU does not back down on the backstop."
The pound has fallen close to 4% since Johnson took over from former Prime Minister Theresa May in July. Investors have upped their bets on a no-deal Brexit due to his “do or die” rhetoric, but the possibility of a snap vote adds another layer of uncertainty.
Adding to the pound’s woes, the U.K. manufacturing sector shrank in August at the fastest pace since 2012. Construction and services figures are due later this week with services activity expected to come in slightly lower than the prior month.
U.K. government bonds rallied for a fourth straight month into the end of August as investors braced for Johnson to suspend Parliament ahead of the Brexit deadline on Oct. 31, limiting the time available to prevent a chaotic exit from the European Union. Opposition lawmakers will present legislation Tuesday that would force the U.K. to delay Brexit again if an agreement hasn’t been reached.
The pound fell as much as 1% to $1.2036 and weakened 0.6% to 90.94 pence per euro. The yield on U.K. 10-year bonds fell five basis points to 0.43%.
(Updates with pricing.)
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