Sterling fell from a nine-month high against the dollar on Thursday as traders braced for this week’s third parliamentary Brexit vote, this time on whether to delay Britain’s March 29 deadline for exiting the European Union.
In a vote on Wednesday, lawmakers resoundingly voted to reject a no-deal Brexit.
Investors said the result could prompt eurosceptic parliamentarians to finally back the unpopular deal Prime Minister Theresa May negotiated with the EU, or lead to a long Brexit delay that could eventually reverse the result of the 2016 referendum.
Both of those scenarios would be positive for sterling.
“There is gradual optimism being priced in and barring something highly unlikely, the possibility of an actual no-deal is not zero but less than 5 percent,” said Tim Graf, head of macro strategy at State Street Global Advisors.
“It’s clear parliament are starting to exert themselves more forcefully.”
Lawmakers will vote later on Thursday on delaying Britain’s EU departure beyond March 29. However all 27 EU members must approve the extension.
May is also pushing lawmakers to vote again next week on a deal they have twice rejected.
Sterling has swung wildly this week between $1.30 and $1.33 and at junctures it has been at its most volatile since the June 2016 Brexit referendum.
Graf described himself as “positive” on sterling but said there was still no sign that May’s deal could be accepted, either in its current form or an amended version.
“There is always the chance the EU won’t grant an extension if they are just going to be trying to push this deal through… that’s where the caution comes in.”
The pound surged more than one percent against both the dollar and euro on Wednesday as parliament voted resoundingly against leaving without a transition agreement.
It hit a peak of $1.3380. Against the euro it had traded as high as 84.72 pence, approaching recent 22-month highs
However, it later retreated from those levels as traders contemplated the array of possibilities that have opened up, including a second referendum or a general election.
By 0930 GMT the pound was half a percent lower at $1.3275. Versus the euro, it was down 0.4 percent at 85.29 pence.
Options markets show implied sterling volatility – a gauge of expected swings in a currency – still elevated, with two-week vols jumping off one-week lows touched on Wednesday.
Wednesday’s vote also saw British government bond yields rise as much as five basis points at one point before easing from those early highs.