Pound sterling set for volatile week as Theresa May faces Brexit deal defeat

MPs are expected to reject the deal, which will probably drag the pound down - but an improved chance of a second referendum could give the currency a boost

Sterling investors are bracing for a week of volatility ahead of Tuesday’s meaningful vote on Theresa May’s Brexit deal.

MPs are widely expected to reject the deal, and analysts say the uncertainty about what the next steps would be means the pound could veer sharply up or down later this week.

The pound hovered around $1.2861 for most of Monday, but jumped briefly against both the euro and the dollar in the late afternoon on reports that the ERG plans to support Ms May’s deal.

If the prime minister responds to a defeat by attempting to introduce another revised deal, as she has done before, the pound is likely to tumble.

Sterling would also likely slump if a rejection of this deal leads to a breakdown of the government. In December, the currency plunged against the dollar and the euro when Ms May delayed the first planned vote on her deal.

A defeat will almost definitely lead to a temporary slip in the pound, traders have warned.

However, if rejection of the deal makes it more likely that a second referendum will be called, the pound could be boosted.

Jasper Lawler, head of research at London Capital Group, said: “The best-case scenario is probably the can being kicked down the road. That is, Theresa May is given the chance to improve the deal and hold a second "meaningful vote" in a few weeks.

“But kicking the can too far will have negative consequences. It seems likely there simply will not be time to make the necessary changes in May's deal before 29 March, especially if there is a general election.”

Mr Lawler added that, while “anecdotally, the Brexit-voting public seem very comfortable with exiting the EU without a deal... there is very little taste for it in parliament”.

He said the most likely next options are a Brexit delay by revoking or extending Article 50. This could pull sterling up in the short term, Mr Lawler said, but he warned: “The resulting uncertainty would be one of the worst scenarios for businesses and the British economy.”

There is always a chance that the vote could go in favour of the deal, although this would by a surprise to the market.

“Should the withdrawal act be ratified on Tuesday, sterling will likely surge around 5 per cent in value against the US dollar,” said Simon Harvey, market analyst at Monex Europe, but he added that “if December’s failed attempt is anything to go by then the chances look slim”.

Mr Harvey agreed that the most likely outcome of a defeat would be further delays to the Brexit process.

“The tight turnaround period to deliver the next steps for a ‘plan B’ seems unachievable if the current deal making process is anything to go by,” he said, adding that “there is a palatable appetite for a delay in the Brexit process as seen by the brief rally after unconfirmed sources reported that Article 50 will be extended”.

Mr Harvey also warned: “The possibility of a snap election or a second referendum remain a tail risk in the event of a defeat on Tuesday, but given the current political landscape, they can’t be ruled out."