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Traders start to question sterling's value as Brexit reaches deadlock

Key Points
  • Sterling is maintaining its level above $1.30 despite a growing fear of a "No Deal" Brexit.
  • Some traders have told CNBC that the currency could be set to slip this week.
  • Lawmakers from Brussels and the U.K. do not yet appear close to a deal that can facilitate Brexit.
Prime Minister Theresa May leaving 10 Downing Street, London, ahead of Prime Minister's Questions. 
Victoria Jones - PA Images | PA Images | Getty Images

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.

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Rocket to $1.50?

Societe Generale's Global Head of Foreign Exchange Strategy, Kit Juckes, told CNBC Monday that the pound is probably hovering around the right level, but could ship value against both the euro and dollar this week.

Juckes said for sterling he was pricing in a "no deal" at somewhere around $1.20 and the present pricing seemed to adequately reflect current tension.

"As a long-term traveler, sterling is very beaten up down here," he added, before noting that any shock cancellation of Brexit would likely see the currency rocket to $1.50.

Over at Nomura, the London-based foreign exchange strategist for Europe, Jordan Rochester, told CNBC Monday that the pound was being sustained by slight dollar weakness, trader commitment to the euro versus the dollar, and the majority in the U.K. parliament that are against allowing "no deal."

"Whilst it is a risk it's no longer the main focus. Instead it's what sort of deal can May secure in time and/or article 50 extension that is driving the narrative for now," he said via email.

France prepares
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The possibility of a "no deal" is also being taken seriously in France, according to Elvire Fabry, a senior researcher at think tank the Jacques Delors Institute.

Fabry told CNBC's "Street Signs" Monday that money was being spent by the French government to help small and medium-sized business understand and prepare for the impact on trade with the U.K.

Fabry said it was time to "engage seriously on the idea of extending Article 50" adding "we are losing precious time."

Article 50 is the legal means by which a country leaves the Union and the U.K. is officially set to exit the bloc on March 29 this year.