Sterling in focus as UK Parliament prepares to vote on Brexit deal

British lawmakers will hold the “meaningful vote” on the government’s Brexit deal on Tuesday evening. The accord is widely expected to be voted down, and although that may hurt sterling initially, the currency’s broader direction will probably depend more on what happens next. Overall, the biggest tail risk for the pound – a no-deal exit – seems to be gradually abating, thereby brightening the prospects for the UK currency.

It’s going to be another crucial week for Brexit, setting the stage for another round of volatility in sterling. The UK House of Commons will vote on PM May’s Brexit deal tomorrow; although there’s no specific time for the ballot, it’s expected between 1900-2100 GMT. The deal is widely expected to be rejected, as nearly every faction of Parliament has pledged to vote against it, including several of PM May’s own Conservatives. Given the overwhelming consensus for a rejection, the real question – which may also determine the immediate reaction in the pound – will probably be how heavy the defeat is, that is to say by what margin the accord is voted down.

A devastating defeat, of say more than 100 lawmakers, would probably be met with selling interest in sterling, as any surviving hopes that a revised version of this deal may be passed later evaporate, and the opposition Labour party – sensing weakness – moves to trigger early elections. On the flipside, if the motion is rejected only by a slim margin, the currency could gain as speculation picks up steam that the government may eventually get its way in subsequent motions, and the PM avoids a no-confidence motion by Labour. Of course, in the unlikely event it’s actually approved, the pound could skyrocket.

Looking beyond the immediate reaction, in the bigger picture, the prospects for the pound seem to be rapidly improving. The most significant risk facing the currency is a no-deal exit, and that disastrous scenario has started to subside somewhat lately as Parliament took more and more control of the Brexit process. Recall that most lawmakers are clearly opposed to a disorderly exit, and if it comes to that, could introduce legislation to forbid it. Meanwhile, the probability for other scenarios that are more positive for sterling, such as a second referendum, is clearly rising.

There are downside risks, of course, with the most notable one being the pound dropping if early elections are called and a Labour government is seen as the likely winner. Speculation for a Corbyn-led government would most probably see UK assets suffer further, on anticipation of higher taxes in the aftermath, particularly on corporations. Even in that case though, considering that Labour is determined to deliver a “soft” Brexit that preserves jobs, and that nearly half of the party wants a second EU referendum, it’s difficult to envision any weakness in the pound being sustained for long.

Turning back to this week’s events, assuming the deal is rejected as anticipated and early elections aren’t called immediately, the government will have three working days to present a “plan B” to Parliament. Admittedly, one of the only realistic options for PM May at that point – as she has repeatedly rejected another referendum – would be to delay the official deadline for exiting the EU, to buy more time for negotiations. While this may be viewed as more “kicking the can down the road”, it may actually prove positive for sterling, as the extra time could allow May to make her deal more “palatable” for lawmakers, raising the odds that a revised version of it eventually passes.

Looking at sterling/dollar technically, immediate resistance to advances may be found near 1.2930, marked by the peak of November 22, with an upside break potentially opening the way for the November 14 top of 1.3075.

On the flipside, initial support to declines could near the 50-day simple moving average, currently at 1.2762, before the January 11 low of 1.2710 comes into view. Even lower, the January 2 trough of 1.2575 could attract attention.