Sterling slips from multi-week high, volatility spikes before Brexit vote

LONDON: Sterling fell from a two-month high versus the dollar on Tuesday and volatility levels spiked as markets braced for parliament to give the thumbs-down to British Prime Minister Theresa May's Brexit deal later in the day.

May is making last-ditch efforts to try to win over lawmakers, warning again that voting down her Brexit deal could lead to the country staying in the European Union.

But she is still expected to lose the vote at 1900 GMT. .

Sterling is seen as having already priced in that outcome, with investors instead focusing on the margin May loses the vote by.

Still, markets expect parliament to block a no-deal or "hard" Brexit -- the worst case scenario -- so the currency has firmed in recent weeks, also benefiting from dollar and euro weakness.

"It's a done deal that the vote will be defeated. Initial market focus will be on the scale of the defeat and the expectation is it will be heavy -- 100-200 votes," MUFG strategist Lee Hardman said.

"The surprise will be if the defeat is narrower. The balance of risks (for sterling) is to the upside as people expect a big margin... But it will still leave us in a state of deadlock."

While a narrow margin of 40-50 votes raises expectations of the deal passing with some amendments, most reckon Britain's March 29 departure date could be delayed or a second referendum called that could end up cancelling Brexit.

The pound slipped 0.2 percent on the day at $1.2847, having retreated from two-month highs hit on Monday at $1.2930. Against the euro, it firmed a touch to 88.950 pence as the euro slipped after the release of German growth data .

The fear of post-vote chaos is again driving up sterling implied volatility -- options markets' gauge of expected swings in an exchange rate. Overnight vol jumped to 23.5 percent  from late-Monday levels around 8 percent.

"Sterling's overnight implied volatility is pricing around a 1 percent move today," Commonwealth Bank of Australia analysts told clients.

One-month implied vol has also crept higher to one-week highs around 12.65 percent after slipping in recent days as risks of a no-deal Brexit appeared to recede.