Brexit high noon spells danger for currency traders

Matt Clinch
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The high-stakes parliamentary vote on Theresa May's Brexit plans is due later today (Source: Getty)

Theresa May’s ultimate showdown has finally arrived.

The high-stakes parliamentary vote on her Brexit plans is due later today, and the outcomes vary wildly – from soaring success to complete political collapse.

Currency traders lie in wait, hoping not to be caught on the wrong side of a sterling trade, which could whip wildly in either direction as the debate rages and the votes roll in.

It could be a late night in the City of London, and thin trade from other regions around the world could exasperate matters.

“Sterling liquidity in Asia is limited, and as such there is a risk – even if a ‘no’ vote is assumed – that does not preclude sterling selling off as it is impacted by headline risk,” says Jeremy Stretch, the head of G-10 foreign exchange strategy at CIBC Capital Markets.

The consensus expects defeat for May and her Brexit proposals, but what’s crucial is by how much.

The Prime Minister needs the backing of half of MPs to win, but experts predict that a defeat of 50 votes or less could be a positive for sterling, in the hope that she could push through some minor amendments in the next few weeks.

A loss of more than 150 votes could see the opposite reaction.

“A larger-than-expected defeat could be seen as GBP negative, as it widens the range of potential political outcomes, including a leadership challenge, a General Election, a Norway-style deal, or a second referendum,” says Simon Derrick, chief currency strategist at BNY Mellon.

Other experts are simply not convinced that clients should be trading the pound during such a rocky few hours.

“Stay away from spot trades altogether,” says Stephen Gallo, the European head of foreign exchange strategy at BMO Capital Markets.

“The leap of faith trade at this point would be to take a long position on a bet that the odds are wrong, and that the withdrawal bill will actually make it through House of Commons. So if you’re feeling very lucky, be my guest.”

My guess? I’ll bet that the vote is rejected, but not by much, and we’ll be back watching another crucial vote in the next few weeks with May still in power.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.