Sterling rose around 1% against both the US dollar and the euro after UK Prime Minister Theresa May indicated she would seek support of the opposition Labour Party in forging a Brexit deal. The market response suggests that investors believe the latest political twist will increase the chances of a soft Brexit, with the UK ending up with closer ties to the EU.

But the situation remains highly unpredictable and investors should not yet take a smooth outcome for granted.

* A positive response from the EU, though likely, cannot be guaranteed. Chief EU negotiator Michel Barnier said on 2 April that a no-deal Brexit "becomes day after day more likely." He added that any UK request to delay its exit longer would require "strong justification" and could undermine "the EU's decision-making autonomy."

* The UK Labour Party could be reluctant to forge a joint agreement. Labour leader Jeremy Corbyn has sounded receptive, saying he would be happy to discuss a joint plan with the prime minister. But hisparty is also divided on the EU and he would likely face resistance from its members.

* Any May move toward a softer Brexit could accentuate divisions in her own party, making it harder for Parliament to reach an agreement. Former Foreign Secretary Boris Johnson, for example, accused the Prime Minister of having "decided to entrust the final handling of Brexit to Jeremy Corbyn and the Labour Party."So with little clarity about the outcome we advise against strong directional trades. Investors with exposure should consider hedging sterling over the near term. Read more in our dedicated Brexit hub.