* Pound drops as chances of third Brexit vote diminish
* But some see upside potential on lengthy Brexit delay
* BOE meeting eyed though unlikely to change outlook (Adds parliament speaker, updates prices)By Tom FinnLONDON, March 18 (Reuters) - Sterling dropped below $1.32 onMonday after the speaker of Britain's parliament said PrimeMinister Theresa May's Brexit deal could not be voted on againunless a different proposal was submitted.The move by parliamentary speaker, John Bercow, saw thepound shed half a percent with investors saying it had hurtMay's chances of getting her EU withdrawal agreement approvedbefore Britain's departure on March 29. "Now the government will have to come back with substantialchanges (which is literally impossible) in relation to the dealotherwise 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 increasedonce again because the EU needs a clear plan and a strategybefore they grant an extension," he added.Other analysts, however, said the pound could enjoy gainsthis week.
"This move by parliament could simply increase the chancesof a substantial delay to Brexit and if that happens the risksof a second referendum or general election go up substantially,"said Ulrich Leuchtmann, a currency strategist at Commerzbank.
May is still trying to salvage her Brexit deal by winningover doubtful lawmakers including the Northern Ireland'sDemocratic Unionist party.Her spokesman said on Monday that Bercow did not forewarnthe government about his statement. May's Brexit deal was defeated last week for a second timein a rebellion helped by Eurosceptic lawmakers in her ownConservative party.
After Bercow spoke, the pound hit the day's low of $1.3183,and was down nearly one percent. It also weakenedagainst the euro to a three-day low of 85.93 pence. Prospects are worsening for May and she suffered a furthersetback on Monday when Boris Johnson, the pro-Brexit formerforeign secretary, refused to back her agreement unless shesecured changes to the Irish backstop - designed to prevent ahard border on the island of Ireland.
"It should no doubt have a moderately positive effect onthe British currency," he added.Sterling traders are bracing for further volatility as Maytries to convince lawmakers to back her deal so that she canattend a European Summit on Thursday and offer leaders somethingin return for more time.
The Bank of England is expected to leave its interest rateoutlook unchanged at a policy meeting on Thursday due to the
deep uncertainty over Brexit.
Money markets currently price in around a 40 percent chanceof a rate rise in December.Last week the currency swung wildly, trading between $1.2945and $1.3380.
This week it has struggled to hold onto gains as traderscontemplate the array of Brexit possibilities that have openedup including a second referendum or general election.Options markets show implied sterling volatility -- a gaugeof expected swings in a currency -- still elevated, withone-week vols near multi-month highs. Sterling vol is higherthan G10 as well as many emerging currency peers. (Reporting by Tom FinnEditing by Peter Graff and KirstenDonovan, William Maclean)
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