Above: Theresa May is tipped by currency strategists to win the parliamentary vote on her Brexit deal, leading to a significant rally in the value of Pound Sterling. Image by Jay Allen © Crown Copyright

- "Expect a significant recovery for the GBP" - SEB

- Pound Sterling back above 1.11 vs. the Euro

- January tends to be most volatile month for FX markets

The British Pound is trading under pressure in holiday-thinned markets at the time of writing, with a mid-morning slump in 0.42% againt the Euro taking the exchange rate back below 1.11 to 1.1089.

There is no news behind the move, but when markets volumes are down - as they are now - any unusually big trades can move the market by greater margins than would be the case were it 'business as usual'. We would warn also those looking to make international payments that January will likely see markets turn more volatile, therefore the risk averse will benefit from the current environment before market conditions become decidedly more tricky.

Marshall Gittler, a market veteran and currently strategist with ACLS Global says January tends to be the most volatile time of the year in the FX market.

"That’s probably because investors who’ve wound down their activity ahead of the year-end book closing rush in to take new positions. Many hedge funds traders for example basically step back from the markets in early December so as not to jeopardize their bonuses for the year. Then in January they start up with a vengance, taking positions that they hope will net them profits over the year," says Gittler.

Sterling will likely certainly be in the mix: will it fall to fresh multi-month lows as news flow on Brexit sours, or will it rally?

According to analysts at SEB - the Scandinavian banking giant - the latter is the more likely.

Markets are accused of being too pessimistic on Sterling by analysts at SEB who say they believe the Pound presents itself as a strategic buy against the Euro ahead of 2019.

The call is based on the premise that the current chronic political uncertainty hanging over the UK will soon dissipate, with strategists expecting Prime Minister Theresa May to win concessions from EU leaders which will in turn allow her to win over parliament and see the Brexit deal passed.

The chances of this scenario playing out are given a 40% probability.

"Tory hardliner Brexiters would at some point realize this deal might be the only way forward to guarantee that the UK would withdraw from the EU," says analyst Richard Falkenhäll with SEB who says the alternatives to May's deal won't include a no-deal withdrawal but to remain or to face a second referendum.

The UK parliament is now in recess, and MPs will return to Westminster on January 7, with the key vote on May's Brexit deal falling in the week commencing January 14.

Any EU concession would likely come in early January, so there could well be moves in Sterling ahead of the actual vote. May failed to secure concessions from European leaders at the December European Council meeting amidst reports some leaders felt it was too early to offer such help in the fear Conservative party and DUP brexiteers would demand yet further concessions.

The outcome of the vote will likely set the tone for Sterling in January, and potentially the remainder of 2019.

"Were the House of Commons to pass the deal with the EU in January we expect a significant recovery for the GBP as this alternative then means the transition period will kick in from 30 March next year," says Falkenhäll.

The call echoes that made by analysts at ABN Amro - another European lender - who say they see considerable gains in the British Pound on the horizon, on the basis that a 'no deal' Brexit will be avoided.

"The likelihood of a no-deal Brexit has fallen significantly," says Georgette Boele, Senior FX Strategist with ABN Amro, "we believe markets are underpricing, perhaps significantly so, the higher chance of a more positive scenario."

However, if the bill fails, we would expect a knee-jerk move lower in Sterling, but the Government would almost certainly extend the withdrawal period to renegotiate the deal or to have time for a snap election.

According to Falkenhäll this outcome would increase the likelihood that the UK will remain in EU, which is why SEB believe these low probability alternatives when combined make for a stronger Pound.

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Buy the Pound

The Pound is a buy against the Euro with SEB heading into 2019 based on the belief that the market's pricing - at about 50% - that a 'no deal' will take place is too great.

"This trade is a play on the fact we don’t expect a hard Brexit and current market pricing suggests this is a 50% probability. Uncertainty will prevail near-term but parliament will have to make a decision to stop a no-deal withdrawal before 29 March. All other outcomes than the UK leaving without a deal is likely to strengthen the GBP from current level and slash the implied volatility," says Falkenhäll.

Forecasts for the Pound

In the wake of a deal being agreed by parliament SEB are forecasting the Pound-to-Euro exchange rate to rally to 1.1765, which gives a decline in the EUR/GBP exchange rate to 0.85.

Further upside will be capped by the ongoing uncertainty as to what the future trading relationship would look like. After all, the EU and UK will then engage in a two year process of trade negotiations, which will surely be tense and run down to the wire.

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