The British pound trimmed some of the losses it suffered during volatile trading on Tuesday after UK lawmakers voted down the latest version of Prime Minister Theresa May’s deal on Brexit.
The overwhelming defeat raises the chances 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.
Investors appeared to be betting that a delay is most likely. The vote lifted the pound, but the currency failed to erase losses suffered earlier on Tuesday. It was trading down 0.7% at $1.31.
Speaking to lawmakers just minutes after the vote, May said the default scenario is leaving the European Union without a deal on March 29.
But she said that parliament would have a chance Wednesday to rule out leaving the European Union without a deal. If that happens, lawmakers would vote Thursday on whether to request a delay from the bloc.
May returned from negotiations with EU officials Monday 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. That caused the pound to drop more than 1% against the dollar.
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.
Kallum Pickering, an economist at Berenberg bank, said parliament is likely to 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.