LONDON: Sterling fell in volatile trading on Tuesday as investors waited for the outcome of a vote in the British parliament where concerns have grown that lawmakers may vote against Prime Minister Theresa May's tweaked deal.
Hours before the vote, May had failed to win over the main Brexit faction in her own party, while Northern Ireland's Democratic Unionist Party (DUP), which props up her minority government, said it would vote against her.
The failure to win political support prompted traders to dump the pound after it scaled a 22-month high versus the euro overnight after May rushed to Strasbourg on Monday to agree legally binding assurances with European Commission President Jean-Claude Juncker.
But Britain's attorney general, Geoffrey Cox, dealt a blow to May's plans, saying the assurances she had been given still meant the United kingdom could be locked in the bloc's orbit after Brexit, the most controversial issue for Brexit-supporting lawmakers.
The pound tumbled nearly a percent after the news as markets had expected him to revise his view of the deal and help win over eurosceptic lawmakers in May's Conservative Party before Tuesday's parliamentary vote on her withdrawal agreement.
It later recouped some losses and was trading down half a percent before the Parliament vote began at 1900 GMT.
"Nobody is confident enough to carry spot positions during the votes," said Steen Jakobsen, Chief Economist & CIO at Saxo Bank.
"People are hoping for a last-minute deal but we advocate having insurance on the downside with sterling puts at a strike price of 1.27-1.28, around the support seen last time."
The barrage of news over the last few hours over the progress of Brexit negotiations sent derivative markets into a tailspin with overnight gauges of expected moves in the pound spiking to its highest levels last seen immediately after the Brexit referendum vote in June 2016.
The pound stabilised around half a percent lower at $1.3084. It had rallied as much as $1.3290 in the Asian session but fell to the day's low of $1.3005 in volatile trading.
It plummeted more than one percent versus the euro to 86.53 pence after earlier trading as high as 84.755 pence.
It was last trading 0.9 percent weaker at 86.24 pence.
"With GCox saying May's new legally binding text doesn't change legal risk on backstop...it is probably safe to say game-over for sterling climbing above $1.33 on deal getting through Parliament today," said Viraj Patel, a currency strategist at financial advisory firm Arkera.
Britain's parliament voted down May's deal by a record 230 votes in January.
If May loses Tuesday's vote, she will face another vote on Wednesday on whether parliament wants to leave the EU without a deal, with a majority expected to refuse the "no-deal" scenario as economically disruptive.
A third vote would then be held on Thursday on whether Britain should request from the EU a limited extension of the March 29 Brexit date.
Traders are expecting big swings in the currency around this week's votes, according to a sharp rise in one-week implied volatility.
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