LONDON (Reuters) - Sterling dropped half a percent on Tuesday as investors took advantage of an early surge to cut their positions ahead of what is expected to be a volatile week as British lawmakers debate Prime Minister Theresa May’s Brexit withdrawal agreement.
British parliament is due to vote on the agreement on Jan. 15, and the run-up is likely to dominate trading of the British currency, with May set to lose the vote unless she can convince opponents within and outside her party to back her deal.
A stronger dollar also weighed on the British currency.
“Sterling traded a little bit stronger today and I think investors took the opportunity for some position adjustment ahead of the potential volatility in the next few sessions,” said Rabobank strategist Jane Foley.
“At the end of the day, May doesn’t have enough support to support her deal in parliament, so investors are looking for opportunities to cut their positions,” she added.
Sterling’s relative strength in recent days is mostly down to dollar weakness - the pound’s performance against the euro has been more muted.
The Telegraph newspaper, citing unidentified sources, reported that British and European officials were discussing the possibility of extending the formal exit process from the European Union amid fears a Brexit deal will not be approved by March 29.
British Brexit minister Stephen Barclay denied the report and said the government was committed to leaving the EU on March 29.
The pound traded as high as $1.2797 on Tuesday before edging down to $1.2720, half a percent lower on the day.
Against the euro, the pound was barely changed at 89.875 pence per euro.
Kit Juckes, currencies strategist at Societe Generale, said it was “clearly impossible” to make reliable sterling forecasts.
“Anything from an endlessly drawn-out Brexit to an amicable agreement or a hard Brexit, everything remains within the realms of possibility, so that the outlook for sterling also ranges from a recovery rally to currency crisis,” he said.
Europe’s biggest fund, Amundi, said it believed there was a 60 percent chance a Brexit deal would be ratified before March but uncertainty remains high.
Despite heightened volatility, the pound has remained stuck in a range against both the dollar and euro, with traders reluctant to push the currency too far one way or the other until there is greater clarity about Brexit.
Clients of Nomura say the most likely outcome from May’s effort to get her Brexit agreement through parliament was for a second vote to take place on the same deal, according to a poll conducted by the Japanese bank.
Should parliament approve the deal, ensuring Britain avoids a dysfunctional exit from the EU in March, the pound would rise 5 percent against the dollar. If the deal is voted down, the pound would lose 2 percent of its value, Nomura said.
Graphic: World FX rates in 2018 tmsnrt.rs/2egbfVh
Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv
Editing by Kirsten Donovan and Ed Osmond