British pound trades flat after Brexit vote but volatility to linger

Prime Minister May is set to face another no-confidence vote on Wednesday

"A disorderly Brexit - for us a very unlikely scenario - would push cable towards the cycle lows of $1.18-$1.20," said Roberto Cobo Garcia at BBVA. Bloomberg

The British pound traded flat on Wednesday, a day after the UK Parliament voted down the Brexit deal put forward by Prime Minister Theresa May.

Sterling is expected to remain volatile as the future of Brexit remains in limbo, analysts said. Pound was trading close to $1.286 on Wednesday morning London time.

“Our short-term pound sterling outlook is bearish, reflecting risks that political turmoil after Tuesday will increase volatility,” David Meier, an economist with Julius Baer, said in a note on Wednesday. “In the long term, we hold a bullish outlook, as a deal, a softer Brexit or a process leading to an aborted Brexit, would improve sentiment from where it currently stands.”

The pound has lost around 14 per cent of its value against the US dollar since the June 2016 vote to leave the European Union.

Mrs May is set to face a second no-confidence vote on Wednesday tabled by Labour leader Jeremy Corbyn. She survived one last year, but lingering uncertainty about her future and the UK's exit from the European Union by March 29 is roiling markets.

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"We do think it is unlikely that sterling will fall to fresh lows unless the current government falls, and that unlikely although the risk is not zero," Alvin Tan, an FX strategist at Societe Generale in London, told Bloomberg.

"Volatility is expected to remain high, but we do think that there is upside for sterling. Sterling is very cheap on the long-term basis, partly because of the probability of the no-deal Brexit."

The pound is expected to remain volatile for the time being until the outcome of Wednesday’s vote.

“Tuesday night’s vote may have increased the chances of a second referendum but it also increased the chances of a no-deal Brexit,” Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong, told Reuters. “Both tails are now a bit fatter and GBP volatility has risen accordingly.”