Parliament is due to vote on Theresa May’s proposed Brexit deal but it is widely expected to be voted down. Dutch bank ING said on Monday it sees just a 5% chance of the deal passing.
However, with the politics of the vote shifting almost hourly and the next steps if the bill is rejected far from clear, analysts warn that sterling could see substantial volatility today and tomorrow as the price reacts to Brexit news-flow.
“It would be wise to treat any sterling cross with extreme caution today,” Neil Wilson, the chief market analyst at Markets.com, said in his morning email to clients. “Sterling is in for a rough ride whatever happens – tin hats time.”
Bloomberg reported on Tuesday that Citi’s private banking arm has told its high-net worth clients not to trade the pound during the vote as a result of volatility fears.
The pound hit a 7-week high against the dollar on Monday amid speculation about hard Brexiteers supporting May’s deal. JR Zhou, market analyst at trading platform INFINOX, called it an “espresso jolt” of a move.
While May’s deal is widely expected to be rejected on Tuesday, analysts said the size of the defeat could determine how the pound moves.
“If the margin of defeat is large it could lead to increased political instability which could be a negative for the currency if it was seen to increase the risks of a ‘no-deal hard Brexit’,” John Fahey, a senior economist at AIB, said in a note on Tuesday.
Nigel Green, founder and CEO of independent financial advisor deVere Group, said: “A significant loss for the government (say by over 40 votes), would lead to a further fall in sterling and negative sentiment towards UK stocks.”
Early estimates suggest the government could lose the vote by the worst margin since 1924. That could raise the risk of not only a no-deal Brexit but also a general election and a second referendum. This could destabilise sterling as “financial markets do not like political uncertainty,” Green said.
UBS’ currency strategist Lefteris Farmakis said in a note on Monday that the balance of risks were skewed to the downside for the pound this week, meaning it is more likely to fall than rise.
“A month after the postponed Brexit vote sterling is faced with the same set of adverse circumstances,” Farmakis and his team said in a note to clients on Monday.
“First, parliamentary arithmetic remains challenging for the government; second, market pressure will likely be required either for a pass on a follow-up vote or more positive tail outcomes (such as a second referendum); third, in most scenarios any relief rally would likely be modest (while the downside in an adverse scenario much more severe); fourth, time is running out; and fifth, an extension of Article 50 also requires a more positive end-game as its conclusion to alter the outlook for sterling.
“Overall, in most scenarios sterling is likely to come under more pressure in coming days.”
ING’s Petra Krpata and James Smith said in a note: “For now, the lack of short-term risk premium priced into GBP and the potential disappointment if Article 50 isn’t extended immediately may translate into weaker GBP this week.”
In the unlikely event that May’s deal does pass on Tuesday evening, the pound is likely to “rally sharply,” Green said.
“Overall then, sterling could experience some volatility today as the currency reacts to events in parliament,” AIB’s Fahey said.
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.