By Tom Finn
LONDON (Reuters) - Sterling dropped below $1.32 on Monday after the speaker of Britain's parliament said Prime Minister Theresa May's Brexit deal could not be voted on again unless a different proposal was submitted.
The move by parliamentary speaker, John Bercow, saw the pound shed half a percent with investors saying it had hurt May's chances of getting her EU withdrawal agreement approved before Britain's departure on March 29.
"Now the government will have to come back with substantial changes (which is literally impossible) in relation to the deal otherwise it means a prolonged Brexit delay," said Naeem Aslam, chief market analyst at retail broker Think Forex.
"The chances of the UK crashing out of the EU have increased once again because the EU needs a clear plan and a strategy before they grant an extension," he added.
Other analysts, however, said the pound could enjoy gains this week.
"This move by parliament could simply increase the chances of a substantial delay to Brexit and if that happens the risks of a second referendum or general election go up substantially," said Ulrich Leuchtmann, a currency strategist at Commerzbank (DE:CBKG).
May is still trying to salvage her Brexit deal by winning over doubtful lawmakers including the Northern Ireland's Democratic Unionist party.
Her spokesman said on Monday that Bercow did not forewarn the government about his statement.
May's Brexit deal was defeated last week for a second time in a rebellion helped by Eurosceptic lawmakers in her own Conservative party.
After Bercow spoke, the pound hit the day's low of $1.3183, and was down nearly one percent. It also weakened against the euro to a three-day low of 85.93 pence.
Prospects are worsening for May and she suffered a further setback on Monday when Boris Johnson, the pro-Brexit former foreign secretary, refused to back her agreement unless she secured changes to the Irish backstop — designed to prevent a hard border on the island of Ireland.
"It should no doubt have a moderately positive effect on the British currency," he added.
Sterling traders are bracing for further volatility as May tries to convince lawmakers to back her deal so that she can attend a European Summit on Thursday and offer leaders something in return for more time.
The Bank of England is expected to leave its interest rate outlook unchanged at a policy meeting on Thursday due to the deep uncertainty over Brexit.
Money markets currently price in around a 40 percent chance of a rate rise in December.
Last week the currency swung wildly, trading between $1.2945 and $1.3380.
This week it has struggled to hold onto gains as traders contemplate the array of Brexit possibilities that have opened up including a second referendum or general election.
Options markets show implied sterling volatility -- a gauge of expected swings in a currency -- still elevated, with one-week vols near multi-month highs. Sterling vol is higher than G10 as well as many emerging currency peers.