March 29, 2019 / 9:58 AM / in 22 days

UPDATE 5-Pound set for weakest month in five after Brexit deal defeated again

* Pound drops half a pct, then recovers

* Implied volatility gauges remain elevated

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv (Adds analyst quote, updates with latest prices)

By Tommy Wilkes and Saikat Chatterjee

LONDON, March 29 (Reuters) - The pound lurched lower on Friday after lawmakers rejected Prime Minister Theresa May’s Brexit deal for a third time, putting the British currency on track for its biggest monthly loss in five.

With May losing again - albeit by a smaller magnitude than the previous two votes - sterling is set to remain under pressure on fears the United Kingdom will crash out of the European Union without a deal on April 12.

Traders say the uncertainty about what happens next is hurting the currency.

“The focus now shifts to the alternatives that parliament will decide on next week and everything from revoking Article 50 to having a second referendum vote is on the table which will weigh on the pound,” said Nikolay Markov, a senior economist at Pictet Asset Management based in London.

The pound fell as much as half a percent to the day’s low of $1.2977, briefly piercing a key market level of the 200-day moving average at $1.2979.

It later stabilised near $1.3024, down 0.2 percent on the day, as traders bought back into the currency.

Against the euro the pound was 0.1 percent lower at 86.19 pence by 1620 GMT.

Moves in the pound were not as dramatic on Friday as with May’s previous parliamentary defeats - traders say investors have scaled back their trading of the pound because it has become so difficult to predict amid the constant and sometimes arcane political developments.

SLOW DEATH OF BREXIT?

Salman Ahmed, global investment strategist at Lombard Odier Investment Managers, said that although uncertainty persisted, the market was right to price out the risk of a no-deal exit from the EU. Sterling had fallen to below $1.25 last year on fears Britain would crash out of its biggest trading partner.

“If the deadline is extended longer we will re-engage with sterling because that will be the start of the slow death of Brexit,” Ahmed said.

After a special sitting of parliament, lawmakers voted 344-286 against May’s 585-page EU Withdrawal Agreement, agreed after two years of tortuous negotiations with the bloc.

The defeat now means that Britain now has until April 12 to convince the 27 capitals of the EU that it has an alternative path out of the impasse, or see itself cast out of the bloc from that date with no deal on post-Brexit ties with its largest trading ally.

On a monthly basis, the pound has fallen 1.9 percent, putting it on track for its worst monthly performance since October 2018.

Volatility indicators for the pound across the curve, a gauge of expected swings in the British currency in the coming months, fell across the board on Friday as traders took profits before the weekend.

One-month volatility gauges fell as much as 1 vol to 12.8 vol but still remained elevated by recent historical levels.

The lack of trading activity has reduced liquidity in the market, exacerbating swings in the currency.

British stocks weakened after May’s deal was defeated, giving up some of their earlier gains.

Core euro zone bond yields also fell after the vote as investors sought safety in government bonds.

Reporting by Tommy Wilkes and Saikat Chatterjee; Editing by Mark Heinrich and Jon Boyle

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