Brexit: How the pound might react to parliament’s crunch vote tonight

Sterling has been plagued by volatility in recent months as uncertainty around Brexit has heightened.

Theresa May's withdrawal agreement has come under pressure from all sides, and she was forced to postpone a December vote on her deal until tonight, when MPs will get their say at 7pm.

But what will happen to the pound?

Ahead of the vote, after recent ups and downs that have characterised the currency since the referendum, sterling was trading at $1.2846.

Unless the Prime Minister wins the vote on her Brexit deal, this volatility is unlikely to end anytime soon.

Read more: Brexit – what happens if Theresa May loses her deal vote

Sterling traders have been urged to proceed with extreme caution as all possible Brexit outcomes remain on the table – here's what could happen.

Theresa May wins

If the Prime Minister manages to get her deal through Parliament, bringing about an end to the uncertainty surrounding Brexit, sterling is likely to rally.

The pound has been dogged by market volatility since the referendum result and the currency is now moving on a ‘headline-by-headline’ basis along with new developments, as it craves clarity.

Analysts predicted the pound could rally towards its June 2016 high of $1.4 in the event of an unlikely victory for Theresa May.

Theresa May loses

The market may have already priced in a defeat for Theresa May but that is unlikely to prevent volatility following tonight’s result.

A defeat would boost the chances of all the remaining options; a second referendum, a no-deal Brexit and a general election.

The former – a second vote on leaving the EU and increased chances of no Brexit – would boost the pound, while a no-deal Brexit or general election would see the currency suffer as uncertainty thrives.

With all three becoming more probable with a defeat – the only thing certain is volatility ahead, with the next developments becoming crucial.

The margin of defeat could also impact sterling.

Analysts said a margin of 100 or less could see the pound hold its ground, but a heavy loss could raise the risk of leadership challenge, bringing the so-called Corbyn risk into play.

What happens next?

The immediate aftermath of a loss for the Prime Minister could see the pound “suffer from the peak of uncertainty” as we await what happens next.

May would likely deliver a speech and could give some guidance to what ‘Plan B’ might be.

But the subsequent actions of Labour leader Jeremy Corbyn, who could potentially table of vote no confidence, could have more of an impact on the pound.

A Nomura clients survey revealed that an election risk, or a “Corbyn risk” was deemed nearly as bad for the pound as the risk of a hard Brexit.

The result of the no confidence vote, which could lead to a general election, would likely take around 24 hours, another potentially tumultuous 24 hours for the pound.

Nomura strategists said the pound would drop three per cent to $1.23 in the event of an election being called, while a Labour government could see it fall five or six per cent.

They advised traders to go long on sterling the moment Corbyn loses a no confidence vote, if that happens, but remain cautious in the meantime.