Pound slides below $1.20 after Boris Johnson threatens snap election

The pound slumped to its lowest level since 2016 before rebounding in volatile trading, as the prospect of a general election added an extra layer of complexity to the Brexit calculus.

Already under pressure from Britain's brinkmanship over its departure from the European Union, sterling fell below $1.20 on concern a national vote may either give Prime Minister Boris Johnson a mandate to quit the bloc without a deal, or usher in an anti-business Labour government. The currency recovered some ground as the House of Commons confirmed lawmakers would grab control of the agenda Tuesday to try to force another Brexit extension.

The sterling has fallen 20% since the referendum vote to leave the bloc in June 2016, with the currency a market barometer for political developments. Mr. Johnson said he would trigger a general election on Oct. 14 if lawmakers vote to force him to delay the Brexit departure date again beyond end-October.

"The latest pound weakness may reflect the fact that recent polls are suggesting that the pro-Brexit Tory party, Brexit Party and the DUP could come close to winning a majority and thus be able to deliver Brexit with or without deal," said Valentin Marinov, head of Group-of-10 currency research at Credit Agricole SA. "The pound outlook could continue to deteriorate as the day progresses and especially if an early election becomes likelier."

The pound dropped as much as 0.9% to hit $1.1959, the lowest since Oct. 7, 2016, before trading 0.2% lower at $1.2040 by 12:30 p.m. in London. U.K. government bonds rallied to send 10-year yields down as much as 8 basis points to a fresh record low at 0.34%, as money markets increased bets on a Bank of England interest-rate cut this year.

A no-deal Brexit may see yields slide to zero or even lower, according to Citigroup Inc. The six-year U.K. note yielded the lowest on the sovereign curve Tuesday, at just 18 basis points above zero.

Overnight volatility on the pound has spiked up to the highest since April ahead of Tuesday's parliamentary vote, with a gauge of three-month price swings picking up to the most since mid-December as the Brexit deadline comes closer.

"Uncertainty is raised in the last 24 hours," said Neil Jones, head of hedge fund currency sales at Mizuho Bank. "Is Brexit delayed or not, do we have an election prior to Oct. 31 or not? Hedge the currency now and ask questions later."

The currency may drop to as low as $1.10 if an election is seen delivering a mandate for a no-deal departure from the EU, according to Lee Hardman, a strategist at MUFG. A Bloomberg survey of strategists carried out last month saw an election as a better scenario for markets than a no-deal Brexit, with a vote seen pushing the currency down to $1.19 versus $1.10 on a crash exit.

Mr. Johnson's combative approach to Parliament has also seen him ask the queen to stop Parliament from meeting for a month, and warn potential Tory rebels that they would be expelled if they voted against him over a Brexit delay. Yet he would still need two-thirds of MPs to vote for an election — or 434 lawmakers. He has only 311.

The pound looks likely to remain under pressure for Morgan Stanley. The move below $1.20 "suggests room to $1.15," strategists including Hans Redeker said in a research note. The bank now expects an election to be called either in October before the Brexit deadline or sometime in the fourth quarter, according to a separate note from its economists.