The UK currency dropped sharply Tuesday after legal advice from a key government official poured cold water on the latest version of the Brexit agreement Prime Minister Theresa May has negotiated with the European Union.
The advice increases the risk that UK lawmakers will reject the deal for a second time in a vote expected at 3:00 p.m. ET.
If that happens, there’s a greater chance that Britain will crash out of the European Union without a deal — doing big damage to the economy — or that Brexit will be delayed, prolonging the uncertainty for business.
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Investors reacted to the developments by pushing the pound down as low as $1.30, a negative swing of 1.7% from levels near $1.32 reached on Monday when hopes for a deal dominated trading.
“One has to have a very strong state of mental health to be able to trade the pound and deal will all these different headlines that contradict each other,” said Jordan Rochester, a foreign exchange strategist at Japanese investment bank Nomura.
The United Kingdom is scheduled to leave the European Union on March 29. There was increased optimism on Monday that May would be able to secure concessions from the European Union that would make her deal more attractive to members of parliament.
May returned from negotiations with EU officials with assurances that could help Britain avoid becoming stuck in a permanent customs union with the European Union, an outcome many Brexit supporters will not accept.
But the government’s chief legal adviser, Geoffrey Cox, said Tuesday the concessions secured by May don’t deliver a fundamental legal change from the previous draft of the agreement.

Breaking higher … or lower

What happens in parliament later Tuesday could cause the currency to break out of the narrow range it has traded in recent months.
Rochester said the pound could strengthen to $1.38 if lawmakers vote for the deal, because the chances of Britain crashing out of the bloc would have decreased dramatically.
A rejection of May’s deal on Tuesday would likely push the pound only modestly lower, Rochester said. That’s because the parliament could vote later this week to rule out a disorderly Brexit — or to delay leaving the European Union.
If the country eventually crashes out of the bloc without a deal, the pound could drop as low as $1.15, according to analysts at UBS.
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Kallum Pickering, an economist at Berenberg bank, said parliament is likely to reject May’s deal, and then vote to delay Brexit.
“A delay to Brexit would be modestly positive for sterling,” he said. “However, it would not completely eliminate the hard Brexit risk.”
Most analysts think the United Kingdom will avoid crashing out of the European Union.
“[The pound] remains the best performing G10 currency in the year to date, implying that the market continues to take an optimistic view on the Brexit outlook,” said Jane Foley, the head of foreign exchange strategy at Rabobank.