(Adds details, quotes)By Saikat ChatterjeeLONDON, March 21 (Reuters) - The pound plunged on Thursdayand was heading for its biggest one-day fall this year ongrowing fears of a "no-deal" Brexit should British lawmakershold firm in their rejection of Prime Minister Theresa May's EUdivorce deal.While a broad-based rally in the dollar also weighed on thepound, traders said the risks of a no-deal Brexit have grown inthe last 48 hours, sending the British currency falling acrossthe board and kicking bond yields lower."A dollar rally and a broad unwinding of long sterlingpositions across the board after the recent rally is weighing onthe pound as the various Brexit positions become morepolarized," said Neil Jones, head of hedge fund currency salesat MUFG based in London.Sterling tumbled 1.3 percent to $1.3004, itsbiggest daily drop since December 2018. It has fallen nearly 3percent from a nine-month high of near $1.34 hit last week.It also weakened 0.8 percent to 87.15 pence against the euro .May has asked European Union leaders to delay Brexit fromMarch 29 until the end of June and said she was preparing for athird vote in the British parliament on the exit deal shearduously negotiated with Brussels.While German Chancellor Angela Merkel has voiced readinessto back a short extension, traders are increasingly worriedthat, if the deal is voted down for a third time in parliament,a host of possibilities open up, none of which are positive forthe pound in the short term."We could still stumble into a no-deal Brexit," said JohnMarley at FX risk management specialist, Smart Currency Businessbased in London.
While banks' assessments of the probability of a no-dealBrexit remain low and have not changed in recent days --Berenberg, for example, see it at a slim 15 percent -- increasedsigns of unease are showing up in currency derivative markets.Risk reversals in the pound maturing in two weeks fell to their lowest levels since mid-December.This is measures demand as a ratio of call to put options; putsoffering the right to sell at a certain price, and calls - theright to buy.
Risk reversals maturing over one to three months registeredbigger declines, falling to their lowest levels since November."Sterling continues to be volatile, pushed and pulled aroundas the news unfolds," UBS Wealth Management told clients."For now, we do not advocate taking directional views on thecurrency, but we remain alert to entry and exit opportunities ifvolatility persists."
BREXIT AND THE BOEIn a sign of how much focus there is on Brexit headlines, anunexpected rise in retail sales data in February failed toelicit any meaningful reaction from the pound.Another source of support for sterling - expectations of aninterest rate rise by the Bank of England - is also ebbing. Thebank had been expected to raise rates once Britain exited the EUwith a deal and transition period in place, but could be forcedto ease policy instead in the event of a no-deal outcome.A market-implied gauge of rate hikes from the Bank ofEngland indicates the possibility of a rate rise by December hasdwindled to 18 percent, compared to 40 percent earlier this week .
However, that also follows Thursday's U.S. Federal Reservemeeting, which wiped out rate-rise expectations for the rest of2019 and has sent global bond yields tumbling.The Bank of England kept interest rates steady on Thursdayand said most businesses felt as ready as they could be for ano-deal Brexit. Rabobank strategists said the BOE's hands were broadly tiedfor now, given the ongoing Brexit negotiations. They expectedthe BOE to keep interest rates on hold for the rest of the yearon the back of a pause by the United States and Europe.
The Brexit risks as well as moves in U.S. Treasury bondsdrove British government bond yields down sharply. Ten-yearyields stood just above 1 percent, at their lowest level sinceSeptember 2017.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^Sterling implied vols rise Sterling plunges ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Saikat Chatterjee with additional reporting bySujata Rao; Editing by Kevin Liffey and Alexander Smith)