The pound staged one of its most dramatic U-turns on Tuesday after Attorney General Geoffrey Cox dented Theresa May’s hopes of getting her Brexit deal through Parliament on Tuesday evening.
Amid hopes of the Prime Minister’s Strasbourg concessions on Monday would be enough to persuade MPs to vote in favour of her deal, the pound had surged more than half a cent to $1.32.
However, Cox’s pronouncement at 11:06am that the deal made no meaningful legal change to the previous concessions sent sterling reeling.
This afternoon it was down more than half a cent at $1.3078.
All eyes are on the outcome of tonight’s crunch vote, due to begin at 7pm, with traders and economists expecting large market swings. Jordan Rochester, a currency strategist at Nomura, said: “If the deal magically passes, the pound would rally because the fall in uncertainty over the next 21 months [until we leave the EU].”
But he added that if the vote fails, which is likely, the move in the pound would probably be capped given that an Article 50 extension still leaves open the options of softer Brexit and a people’s vote.
George Brown, economist at Investec, said the factors over tonight’s vote “remain nuanced”.
“The markets assumed the Prime Minister had spoken to Cox about this before and had his assurances.” However he said it was still far from clear how Jacob Rees-Mogg’s European Research Group faction of Brexiteer MPs would vote. “They may decide if they reject this deal, they might end up with a much softer Brexit further down the line. We would urge investors to be very cautious on the pound with all these risks.”
Naeem Aslam, currency trader at ThinkMarkets, blamed hedge funds for sterling’s volatility over the past 24 hours. “Hedge funds have bet to the downside and so when [May] came back last night with what looked like a deal stop-losses were triggered. This pushed the pound higher.”
A stop loss is an order placed with a broker to sell once the pound reaches a certain level.
Some traders accused May of over-hyping her meeting in Strasbourg, Aslam said. He continued: “It was another trick in her book and she made the announcement on her own without any backing. It was false optimism and nothing she said was legally binding.”
Aslam said that sterling could sink to $1.28 if she loses the vote tonight.
