Pound down as investors weigh worst-case Brexit scenario

The pound fell in Asian trading as investors started to weigh a worst-case Brexit after Prime Minister Theresa May’s plan was roundly defeated by UK lawmakers.

Sterling weakened against most its Group-of-10 counterparts, while traders said flows were thin as most investors were staying on the sideline after Tuesday’s whipsaw session. While May is expected to survive a vote of no confidence that will take place on Wednesday, uncertainty over how she will put together a new deal is spurring risk aversion.

“Tuesday night’s vote may have increased the chances of a second referendum but it also increased the chances of a no deal Brexit,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. “Both tails are now a bit fatter and GBP volatility has risen accordingly.”

The pound dropped 0.1% to $1.2848 as of 12:50 pm in Tokyo after sliding as much as much as 1.5% on Tuesday before erasing all those losses. Sterling was little changed at 88.73 pence per euro.

The UK currency’s volatility is rising again as traders brace for Wednesday’s confidence vote that was tabled by Labour leader Jeremy Corbyn. One-week implied volatility climbed 0.76 to 14.6450 after dropping the most in almost month on Tuesday. One-month volatility increased 0.17 vol to 13.025.

The pound has weakened almost 14% since the day before the U.K. voted to leave the European Union in June 2016 amid concern the departure would hurt its economy. Bank of England governor Mark Carney has said a no-deal outcome may lead to a quicker pace of interest-rate increases to control inflation.

All options on the table 

The opposition Labour party says all options, including campaigning for a second referendum, remain on the table if there isn’t a general election. That would be the best case for sterling, boosting the currency to $1.35, according to a survey of analysts. Leaving with no deal would see the pound drop to $1.15.

“While markets see a delay to Brexit as a tactical buy for the pound, politicians in the U.K. and the EU are not underestimating the risk for a disorderly Brexit”, Philip Wee, a foreign-exchange strategist in Singapore, wrote in a research note.

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