Sterling huddles near 2-1/2 month highs on Brexit nerves

LONDON (Reuters) - Sterling firmed a touch on Tuesday but held well off recent multi-month highs against the euro and dollar as traders weighed up whether lawmakers would back a key parliamentary amendment that would effectively take a no-deal Brexit off the table.

The UK parliament will debate and vote later in the day on Prime Minister Theresa May’s response to the overwhelming rejection of her Brexit plan earlier this month.

But the main focus is on amendments which have been put forward by other lawmakers, especially one that provides for postponing the March 29 Brexit deadline should a divorce deal with the European Union not be approved by parliament by Feb 26.

That amendment is seen as the most likely to pass if the opposition Labour Party does back it as many have indicated. Goldman Sachs said that amendment is the most likely to pass in a note on Monday.

However, sterling which recently scaled 2-1/2 month highs against the dollar at $1.3218 on optimism that no-deal Brexit would be avoided, has retreated from those levels and stood at $1.3171, up 0.11 percent on the day.

Against the euro it was flat at 86.88 pence, holding well off 10-month highs around 86.18 pence hit on Friday.

If the amendment passes, “the pound could strengthen further lifting cable towards the $1.3300-level,” analysts at MUFG told clients, adding that failure to pass it could lead to the currency slumping all the way back to $1.3050.

Senior Conservative lawmaker Graham Brady has put forward another amendment, calling for the Irish backstop arrangement envisioned by May’s Brexit divorce deal to be removed and replaced with “alternative arrangements”. This is not expected to pass.

Implied sterling-dollar volatility has also risen in the run-up to Tuesday night’s vote, with one-month volatility at a one-week high at 11.12 vol.

Analysts at CBA warned that sterling’s fate hinged near-term on support from Labour lawmakers, adding that “without explicit Labour support, the Cooper‑Boles amendment may struggle to win a Parliamentary majority even if it is helped by pro‑Remain Conservative MPs.”