Sterling nears three-month low as investors prepare for Brexit vote

LONDON (Reuters) – Sterling sank to a near three-month low against the euro on Monday as investors positioned for a parliamentary vote on Britain’s Brexit deal with the European Union that Prime Minister Theresa May is widely expected to lose.

Easing some concern about Britain crashing out of the bloc in March without a deal, the EU’s top court ruled on Monday that the British government may unilaterally reverse its decision to leave.

Traders are trying to predict how the pound – among the worst performing major currencies of 2018 – would react if May loses the vote and scenarios include a no-deal Brexit, a renegotiated deal and a second referendum.

The currency traded flat against the dollar at $1.2721 GBP=D3 and was down 0.3 percent against the euro at 89.88 pence, its lowest since Sep 24. EURGBP=D3

“The likely loss of the vote accompanied by the growing risk of a leadership challenge (to May) should be negative for the pound and send EUR/GBP above 0.9000 this week,” said Chris Turner, head of currency strategy at ING in London.

Analysts are focussing on the number of votes May could win or lose by and what that could mean for her chances of re-negotiating a deal with the European Union.

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A narrow defeat for May – say by around 20-50 votes – is seen by investors as the most likely outcome and has the potential to cause short-term volatility for the pound.

A Reuters poll predicted a 2.75 percent fall in the currency should the vote fail to pass.

An emphatic defeat for May by a margin of around 100 votes would leave her withdrawal agreement in tatters and propel sterling into the unknown.

Such a conclusive thumbs-down could convince markets that Britain is heading towards a no-deal Brexit and push the currency below $1.20, said Oliver Brennan, a strategist at TS Lombard.

“We have to be prepared for the fact that the FX market’s initial reaction, that is taken mechanically after the vote is first counted, might not be the correct one and that afterwards there will be some strong moves in both directions,” said Ulrich Leuchtmann, an FX strategist at Commerzbank in Frankfurt.