Sterling rallied on Tuesday after UK Prime Minister Theresa May presented Parliament with a new timetable that will give MPs the opportunity to prevent a no-deal Brexit on 29 March. The pound rose 0.9% against the euro to reach its strongest level since May 2017 and also gained 1.2% against the US dollar. The pound appreciated a further 0.2% against the euro and the USD on Wednesday morning.

But we caution against chasing the rally, as downside risks for the British pound remain in place

* No-deal still on the table. In a series of votes to take place between 12 and 14 March, MPs will get the chance first to vote on the revised withdrawal agreement. If this is rejected, MPs will be asked to vote on leaving the EU without a deal. If this second vote is rejected, MPs will then be invited to vote on a short delay. But May was unequivocal that any extension would be short, unlikely to be repeated, and that no-deal remains possible at the end of any extension. If the impasse cannot be broken, all options remain on the table, including a general election and perhaps a second referendum. The further uncertainty this might cause is unlikely to be welcomed by markets, which could mean that the pound may not build upon its recent bounce.

* Reaction to no-deal would likely be significant. We expect GBPUSD to trade around 1.28 and EURGBP around 0.90 over the next three months. Given the wide range of Brexit outcomes, we think the risks around those forecasts are more important than the numbers themselves. In a hard Brexit scenario, we think GBPUSD could fall to 1.15 and EURGBP rise close to parity. The run-up to a general election or second referendum would likely be less bad, but should still see the pound drop considerably from current levels.In our view, the risk-reward tradeoff to buying sterling only becomes attractive at levels of 1.24 and below in GBPUSD and 0.92 and above for EURGBP. Equally, the possibility remains that May will get her deal approved by MPs when they vote on it on 12 March. Many of the Euroskeptics in her party and Labour MPs in "leave" voting constituencies will be concerned about any prospect of delay and may ultimately decide that the deal on offer is better than the potential alternatives. As such, this may not be the right opportunity yet to tactically pursue gains from outright short-sterling positions. However, we recommend that investors hedge sterling downside risks over the coming weeks.