LONDON (Reuters) - Sterling rose slightly on Monday after British lawmakers voted to wrest control of the Brexit process from Prime Minister Theresa May for a day, but the gains were muted with traders little wiser about when, how and even if Britain will exit the European Union.
Seizing control of the process from May means lawmakers should now vote on a range of Brexit options on Wednesday, giving Parliament a chance to indicate whether it can agree on a deal with closer ties to Brussels, which most investors would welcome.
But there is no guarantee the so-called indicative votes will bind the government. May, despite her authority being undermined, said it would not. Her government called for realism after the vote for Parliament to take control.
May admitted earlier on Monday she still lacked support to put her twice-rejected Brexit withdrawal deal to a third vote, keeping sterling under pressure in the previous European trading session.
British politics is at fever pitch, and investors are struggling to navigate the blizzard of headlines. A range of outcomes remain possible including a long Brexit postponement, a no-deal exit or no Brexit at all.
While volatility is high, the pound remains around the same levels it traded at in late January. Traders say although the market is betting that a chaotic no-deal Brexit will be avoided, it has little conviction on anything else.
“I’m more worried about no-deal Brexit than the market,” Thomas Costerg, economist at Pictet Wealth Management, told Reuters before the results of Monday’s voting. “The view that no-deal Brexit won’t happen because there is a majority in parliament against that is a bit of simplistic view ... Accidents can happen.
“Options are narrowing and narrowing and narrowing,” he said, predicting sterling would drop to as low as $1.20 with a no-deal Brexit and rise to at least $1.35-$1.40 if May’s deal was passed.
Sterling rose 0.2 percent to $1.3224 at the start of the Asian session - when trading volumes tend to be very thin - after Parliament voted to take control for a day, before giving up some of those gains.
Against the euro, it strengthened 0.2 percent to 85.59 pence per euro..
Investors waiting for a eureka moment that brings clarity on Brexit could be disappointed, said Nomura analyst Jordan Rochester, adding that the indicative vote is “probably just another baby step towards it.”
With the prime minister short of support - the Northern Irish party propping up her government still opposes her deal - it is not clear when May will bring her divorce agreement back to parliament.
The EU has said Britain can have a short delay to Brexit but May must first win parliamentary approval for her withdrawal deal from the bloc.
GRAPHIC: One month implied vols at 3-1/2 month high, click tmsnrt.rs/2WmPyEd
Currency derivative markets signal growing caution about the pound, with one-month risk reversals on sterling versus the euro and the dollar at multi-month highs.
An indicator of how bearish or bullish investors are on the outlook of the currency, risk reversals signal that short-term negative bets on the pound are piling up rapidly despite the broader calm in the spot markets.
Yields on British government bonds have tumbled in recent days as investors seek safety, with the yield on the 10-year Gilt falling below 1 percent for the first time since 2017.
GRAPHIC: Gilt yields fall below 1 pct, click tmsnrt.rs/2CClcWR
Additional reporting by Tom Finn, Josephine Mason and Sujata Rao; Editing by Janet Lawrence, Ed Osmond and Leslie Adler