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Pound Sterling is being tipped to sink back toward its post-referendum low against the Euro this week, according to analysts at TD Securites, who are warning that the Pound-to-Euro rate is on its way into a new and lower trading range.
According to the Canada-based global investment bank, Parliament's ongoing battle over Brexit will be the catalyst for losses this week as it is likely to see markets bet the British currency is soon clobbered by either a 'no deal' Brexit, or rising odds of a Labour Party government coming to power.
"We emphasise that Sterling continues to face very large and very binary risks. This has made positioning in GBP difficult - in either direction - in recent months. Indeed, we have considered the pound virtually un-investable for much of the last year as traditional drivers have been pushed aside," says James Rossiter, a strategist at TD Securities in London.
Losses are expected to come this week after the House of Commons rejects Prime Minister Theresa May's proposal for exiting the European Union in a vote scheduled for the evening of Tuesday, 15 January.
MPs are widely expected to vote against the EU Withdrawal Agreement. Those who oppose leaving claim the agreement will lead to too significant a break with the bloc, while those who favour leaving allege it will hand even further control to the bloc and produce an exit in name only.
"A failure to pass Parliament puts the deal in legislative limbo. The government is now under instructions to submit a revised proposal within three working days, but there is little indication right now of what shape this could take. Additional amendments would leave this subject to further uncertainty. Hopes of further EU concessions could produce flashes of optimism, but scope for disappointment looms large," says Rossiter.
Any failure by parliament to approve the agreement will be seen by the market as making a 'no deal' Brexit more likely, because leaving the EU without any formal agreement is the default outcome established by the EU Withdrawal Act and Article 50 protocol in the Lisbon Treaty.
A 'no deal' outcome would see the UK default to doing business with EU countries on World Trade Organization (WTO) terms, which most analysts say would be bad for the economy and currency. Parliament has until ten minutes to midnight on March 29 in order to approve the agreement or an alternative.
Rossiter and the TD Securities team say they think there's a 70% chance of some kind of agreement eventually being passed but that there will be many false dawns and that the overall process will be by no means smoothe.
This is why they are betting against the Pound using derivitives from the options market, which will limit losses for clients if it turns out they are wrong but will also cap profits if and when it transpires they were right.
"We think EUR/GBP could challenge key resistance around 0.91 on the way to a new, higher trading range," Rossiter says.
Rossiter's projection for EUR/GBP to challenge 0.91 gives a challenge of the key 1.10 support in Pound-to-Euro terms.
The TD Securities team have acknowledged that there are "upside risks" for the Pound as well but is more conscious of scope for downside over the coming weeks.
However, analysts at some other firms are focused more on potential for the exchange rate to rise if and when parliament passes the Withdrawal Agreement. Nomura advocated buying Sterling last week as do the currency strategy team at Goldman Sachs.
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