The sterling sank in volatile trading on Tuesday after Britain’s attorney general said the legal risks of a Brexit deal with the European Union had not changed, cutting the chances of the agreement getting through the British parliament.
Geoffrey Cox said a revised Brexit deal, secured by Prime Minister Theresa May late on Monday with the European Union, had not given Britain legal means of exiting the so-called Irish backstop arrangement.
Markets had pushed the pound to a 22-month high versus the euro higher before the attorney general spoke.
They expected him to revise his view of the deal and help win over eurosceptic lawmakers in May’s Conservative Party before Tuesday’s parliamentary vote on her withdrawal agreement.
“With GCox saying May’s new legally binding text doesn’t change legal risk on backstop…it is probably safe to say game-over for sterling climbing above $1.33 on deal getting through Parliament today,” said Viraj Patel, a currency strategist at financial advisory firm Arkera.
With no clear path yet to an orderly British exit from the EU less than three weeks before the official departure date, the pound remains at the mercy of Brexit headlines.
At 1120 GMT the pound was down one percent against the dollar at $1.3005. It had been as high as $1.3290 earlier in the session.
It plummeted more than one percent versus the euro to 86.53 pence after earlier trading as high as 84.755 pence.
Investors are braced for a vote at 1900 GMT that could decide how, and if, Britain leaves the EU in less than three weeks. Overnight volatility in the pound shot to its highest since shortly after the Brexit referendum in June, 2016.
The export-heavy FTSE 100 rose as sterling dropped. Safe-haven bond yields fell back, with Germany’s benchmark 10-year bond yields hitting session lows at 0.069 percent. British gilt yields also fell back.
Britain’s parliament voted down May’s deal by a record 230 votes in January.
Analysts said earlier that sterling was gaining because whether lawmakers vote for or against May’s deal at the second attempt on Tuesday, the likely outcome will diminish the chances of a potentially chaotic no-deal scenario.
If May loses Tuesday’s vote, she will face another vote on Wednesday on whether parliament wants to leave the EU without a deal, with a majority expected to refuse the “no-deal” scenario as economically disruptive.
A third vote would then be held on Thursday on whether Britain should request from the EU a limited extension of the March 29 Brexit date.
Traders are expecting big swings in the currency around this week’s votes, according to a sharp rise in one-week implied volatility.
One-week implied volatility measures demand for options to hedge against big currency swings. A higher percentage reflects greater expectations of currency movements over the next seven days.
