Brexit has entered a standoff phase and sterling traders could be underestimating the possibility of a "no-deal" scenario.
"Which side will 'blink first?' We are not sure, but investors need to assign a reasonably high probability that neither side blinks at all," Stephen Gallo, the European head of foreign exchange at BMO Capital Markets, said a recent research note.
Last week's votes in the U.K. Parliament sent conflicting messages to Brussels. On the one hand, most lawmakers indicated they would not support a "no deal" eventuality, where Britain leaves without a formal agreement and has to reply on WTO trading rules. But a similar majority also voted to change the existing Withdrawal Agreement that Prime Minister Theresa May agreed with the EU last year.
EU officials have been quick to reject the latter as a possibility, and Gallo believes we are now in a "game of chicken" between Brussels and the U.K. government. He said the current spot price for sterling versus the dollar, just above at $1.30, didn't factor in as much Brexit risk as other markets.