By Jemima Kelly
LONDON (Reuters) - Investors have largely priced in the British government losing its Supreme Court appeal on whether it can trigger Brexit talks without parliamentary approval, but traders - both human and computer models - will scour the ruling for clues on whether regional assemblies will get a say.
British Prime Minister Theresa May will learn at 0930 GMT on Tuesday whether the court has upheld a High Court decision in November that her government must get approval from fellow Members of Parliament before triggering of Article 50 of the Lisbon Treaty, the formal means of exiting the bloc.
The government is widely expected to lose its appeal - online spreadbetter Betfair is showing a 90 percent probability that the Supreme Court will uphold the previous ruling.
But analysts said the ruling could contain many as-yet-unknowns, meaning sterling volatility - which has been elevated in recent months and drove the biggest one-day rise in the currency since the 1990s last week - is likely to spike around the time of the court ruling.
Key words that algorithm-driven trading models - which take up an increasingly large slice of currency markets - have been programmed to react to in a binary manner are likely to act as the initial sterling triggers, with human traders, who need more reaction time, following behind.
"It's not just a case of which way they rule – the exact wording of what sort of involvement parliament will have will be important," said MUFG currency strategist Lee Hardman.
"The knee-jerk reaction will probably be to see the pound strengthen, but the upside would probably be fairly modest on the back of that," he added.
Crucial among the unknown risks in Tuesday's ruling - and therefore likely trigger points, analysts said - would be whether the Supreme Court rules that MPs not just in Westminster but also in devolved parliaments across Britain would have to approve Article 50 being triggered.
While the thrust of the case centres on whether the British parliament has to give its assent, the judges also heard arguments from the Scottish government and lawyers for Northern Irish challengers that Britain's devolved assemblies must give their approval too.
Should the court agree - an outcome ministers believe is unlikely - an ongoing political breakdown in Northern Ireland could derail May's timetable, following the collapse of the province's power-sharing government.
"A key risk would be if the court were to give Scotland’s and Northern Ireland's assemblies a say, as that could trigger a potential constitutional crisis," Citi currency analyst Nishtha Asthan wrote in a note to clients.
If that ruling were to simply lead to a delay in the triggering of Article 50, however, without a crisis, investors said that could boost the pound.
"Anything that’s going to disrupt (the government’s plans) would be sterling-positive," said Ian Gunner, currency fund manager at hedge fund Altana.
STERLING AT 5-WEEK HIGH
May has said she will trigger Article 50 by the end of March, and last week detailed her vision for a clean break with the EU by quitting its single market.
Though that effectively meant Britain would undergo the "hard Brexit" many investors have feared, May's relatively conciliatory tone and the fact that she had removed a layer of uncertainty was interpreted as a positive by markets - sterling soared by 3 percent on the day of the speech against the dollar
It was up as much as 0.8 percent on Monday at a five-week high of $1.2472
Against the euro, sterling rose 0.4 percent to 86.16 pence (EURGBP=D4).
"While the Supreme Court ruling that the parliament needs to approve Article 50 is probably in the price, should the Supreme Court rule that parliament needs a say in the exit strategy details, sterling could get a further lift," said ING's global head of EMEA research, Chris Turner.
"We are very bearish on sterling/dollar this quarter, but are wary that this week could see a correction into the $1.25-26 region."