Sterling increased marginally on Monday after British legislators voted to wrest control of the Brexit procedure from Prime Minister Theresa May for a day, but gains were muted with traders little wiser about when, how and even though Britain will exit the European Union.
Seizing control of the procedure from May means legislators should now vote on a range of Brexit options on Wednesday, giving Parliament an opportunity to indicate whether it can approve on a deal with closer bonds to Brussels, which most investors would welcome.
However, there is no assurance the alleged indicative votes will bind the government. May, in spite of her authority being weakened, said it would not. Her government called for realism after the vote for Parliament to take control.
May confessed earlier on Monday she still not have support to put her two times-rejected Brexit withdrawal deal to a third vote, keeping sterling under pressure in the preceding European trading session.
British government is at fever pitch, and investors are struggling to navigate the blizzard of the headlines. A range of results stay possible including a long Brexit postponement, a no-deal exit or no Brexit at all.
Whereas volatility is high, the pound remains around the same levels it traded at in late January. Traders say even though the market is wagering that a confused no-deal Brexit will be evaded, it has little conviction on anything else.
"I'm more worried about no-deal Brexit than the market," Thomas Costerg, economist at Pictet Wealth Management, told Reuters before the results of Monday's voting. "The view that no-deal Brexit won't happen because there is a majority in parliament against that is a bit of simplistic view ... Accidents can happen.
"Options are narrowing and narrowing and narrowing," he said, predicting sterling would drop to as low as $1.20 with a no-deal Brexit and rise to at least $1.35-$1.40 if May's deal was passed.
Sterling increased 0.2 percent to $1.3224 at the beginning of the Asian session – when trading volumes tend to be very thin – after Parliament voted to take control for a day, before giving up some of those gains.
Versus the euro, it reinforced 0.2 percent to 85.59 pence per euro.
Investors waiting for an astonishment moment that brings clearness on Brexit could be disappointed, said Nomura analyst, adding that the indicative vote is “probably just another baby step towards it.”
With the prime minister lacking in support – the Northern Irish gathering propping up her government still opposes her deal – it is not clear when May will bring her separation contract back to parliament.
The EU has said Britain can have a short deferral to Brexit but May must first win parliamentary approval for her withdrawal deal from the alliance.
Currency derivative markets indication rising caution about the pound, with one-month risk reversals on sterling against the euro and the dollar at multi-month highs.
An indicator of how bearish or bullish investors are on the point of view of the currency, risk reversals signal that short-term negative wagers on the pound are piling up quickly regardless of the wider calm in the spot markets.
Yields on British government bonds have dropped in current days as investors look for safety, with the output on the 10-year Gilt tumbling below 1 percent for the first time since 2017.