As the countdown to the Brexit divorce deal’s judgment day begins, pound investors will be following the mood in Parliament to gauge its chances of survival.
Sterling will be vulnerable to swings on signs that lawmaker opposition to the deal is increasing or waning during debates that kick off on December 4, ahead of a vote a week later. Butterfly options, a measure of the likelihood of big moves in the currency, are well above this year’s average after spiking last month.
“It is impossible to predict when someone could say something that moves the pound,” said Esther Reichelt, a currency strategist at Commerzbank. “We’re basically constantly keeping our eyes on sterling and Brexit-related news flow.”
The uncertainty about the Parliament vote has driven the pound down for a third consecutive week toward $1.27, leaving it as one of the worst-performing Group-of-10 currencies this year. A Bloomberg survey of strategists and fund managers saw a 55 per cent chance that lawmakers will reject the divorce deal.
UK Prime Minister Theresa May needs 320 votes for her deal to be approved, and that’s looking unlikely. While many members of her own Conservative Party are against it, Ms May won backing from two prominent pro-Brexit ministers this week, including International Trade Secretary Liam Fox.
[ UK prime minister says focused on December Brexit vote and not on alternatives ]
[ UK science minister quits over Theresa May's Brexit deal ]
Traders will be watching for details of attempted tweaks to the bill, which could make the agreement more palatable. Both Ms May and her European Union counterparts have said the existing deal is the only one on the table, yet the prime minister has backed down from trying to prevent amendments.
Failure would open up “massively diverging implications” for the pound, ranging from $1.10 on a no-deal scenario to $1.35 on a second referendum, according to Neil Jones, head of hedge fund currency sales at Mizuho Bank.
“The pound should continue to decline next week and into December 11 on the principle of uncertainty,” Mr Jones said. “The next two weeks should be very interesting, at the very least will keep volatility alive.”