LONDON/NEW YORK: Sterling briefly swooned to a 17-month low on Tuesday, before recovering ground to trade little-changed on the day, in a volatile session dominated by Brexit-related headlines.
The British currency fell sharply after Prime Minister Theresa May's government was found in contempt of parliament on Tuesday for refusing to release its full legal advice on Brexit, underlining the depth of opposition among lawmakers to her deal on leaving the European Union.
However, sterling rebounded after the government lost a vote in parliament on Tuesday that could reduce the likelihood of Britain leaving the EU without any deal.
The defeat could neuter the threat May has been using to persuade lawmakers to back her deal: that if they don't, Britain could leave the block without any deal.
The pound touched a low of $1.2659, down around half a percent on the day and its weakest since June 2017, before recovering to trade about flat on the day.
"What is clear, we think, is that the option that commands the least support is that of Hard Brexit," Nomura market strategists Jordan Rochester and Andy Chaytor wrote in a note.
"So all else equal, we believe this amendment makes Hard Brexit less likely. Coming on the heels of the ECJ (European Court of Justice) opinion earlier today, the narrative should start moving away from Hard Brexit," they wrote.
Earlier in the session, sterling had found some strength after a senior European Union legal adviser said Britain could unilaterally withdraw its Brexit notice, easing some concern among investors about Britain crashing out of the bloc in March without a deal.
The growing chance of averting Brexit altogether -- potentially via a second referendum -- has led some investors to start pricing out the prospect of a damaging "no deal" departure from the EU, analysts said, lifting sterling.
"If the European Court decides to support this opinion ... it will reinforce the hand of those who want the UK parliament to overturn the referendum result and stay in the EU," said CMC Markets' chief analyst Michael Hewson.
"That may well be positive for the pound in the short term but could be poisonous for politics in the UK," he added.
May's spokesman said on Tuesday the government is not going to revoke its notice to quit the European Union.
May has secured an agreement with EU leaders that will see Britain leave the bloc in March next year with continued close trade ties, but the odds look stacked against her getting it through a deeply divided British parliament.
Opposition Labour finance spokesman John McDonnell said last week a second Brexit referendum "might be an option we seize upon".
The comments raised expectations the Labour party could back putting Brexit to a second vote though it is unclear what impact such a prospect would have on sterling.
"A lot of dire developments would probably have to take place first before a second referendum happens," said analysts at MUFG.
Recent positioning data suggests hedge funds have started to unwind large short positions on sterling as hopes grow that Britain may manage to negotiate an orderly Brexit.
But growing domestic opposition to May's Brexit arrangement has continued to pressure sterling, pulling it down 3 percent from a Nov. 7 high of $1.3176.