The next few weeks will likely define the Brexit process as a whole, with Prime Minister Theresa May heading for a showdown with the country’s lawmakers at a parliamentary vote.
The uncertainty has caused a wave of activity across the City of London, with currency experts busy predicting how sterling could trade during this volatile period.
One forecast from Japanese investment bank Nomura suggests the pound could jump approximately 6 percent on that vote to 1.36 against the dollar. It currently trades at closer to $1.28.
The call from Nomura strategists highlights that if all goes well for May and she gets enough backing for her Brexit withdrawal agreement, there will be a rally for the British pound.
“We believe the market currently prices more risk of hard Brexit than remain, so if we hit the ‘modal’ outcome the result is a sell-off in gilts (U.K. government bonds) and (as) rally in FX (foreign exchange),” Nomura said in a research note Thursday.
The hard Brexit scenario is based on the assumption that the U.K. leaves the European Union with no deal in place and no transition period.
‘Very difficult’ for May
The U.K. Parliament is likely to vote on the withdrawal deal — the 585-page document detailing the U.K.’s departure from the EU — on December 11.
The vote will be crucial in understanding what happens next and approval will be a tough ask for May, given that many lawmakers have voiced their opposition on the withdrawal deal. May needs the backing of around 320 lawmakers to move on with the process — without that support the U.K. could crash out of the EU next March without any sort of arrangements — raising costs and uncertainty for businesses and consumers.
If the U.K. Parliament does vote down the exit agreement, Nomura strategist believe sterling could drop as much as 8 percent and hit roughly $1.18.
Christopher Turner, the global head of strategy at ING in London, believes that it will be “very difficult” for the prime minister to get the necessary parliamentary support.
“I think that uncertainty will dominate, and GBP (the pound) will probably underperform during this period,” he said in an email, suggesting cable (sterling-dollar) will test lows of $1.26.
Meanwhile, Jane Foley, the head of foreign exchange strategy at Rabobank, also told CNBC’s “Street Signs” Monday that there’s a chance investors will start to bet against sterling with greater volumes, as the overall market consensus shifts towards pessimism.
“(It) still appears that the consensus amongst market commentators, banks, etc, is that still the vote will pass, meaning that if that market consensus begins to shift there could be a lot of clients out there, corporates, funds, etc who could become even more short sterling than what they are,” she said.
Bob Janjuah, a senior independent client advisor at Nomura told CNBC’s “Squawk Box Europe” Monday that markets are paying less attention to Brexit compared to earlier on in the negotiations.
“It’s been pretty flat,” he said about the market reaction Monday morning, following a special Brexit summit in Brussels where EU leaders signed off on May’s withdrawal agreement.
“My sense is that people have kinda accepted there’s going to be some sort of Brexit, it’s probably going to be quite compromised and quite fudgy … And it is one out of many big other issues (globally),” he added.
As a result, Janjuah also said: “I don’t think the U.K. stock market, the FTSE, will significantly out or underperform the global indexes.”