The British pound shrugged off fast-paced political drama this week, but faces sterner tests in the coming weeks and months as Brexit takes shape, analysts warn.
Sterling, which slumped after Britain’s shock 2016 referendum to exit the European Union, has only wobbled in response to recent turmoil over Prime Minister Theresa May’s Brexit plans.
Markets remain fearful of a “no deal” scenario under which Britain reverts to World Trade Organisation tariffs and increased barriers, sparking widespread economic uncertainty.
However, such a development, which could potentially cripple supply chains between Britain and the European Union, is not expected by many pundits.
“The chance of a no-deal Brexit — the worst case scenario for the pound which would likely drag it down to the region of $1.10 — is for now priced out,” said ActivTrades analyst Ricardo Evangelista.
– Humiliating defeat –
MPs gave May the heaviest drubbing in modern British political history on Tuesday by rejecting the divorce deal by a stunning 432 votes to 202.
The currency briefly hit a near two-year low on Tuesday after the humiliating parliamentary defeat.
However, the pound then bounced back as traders bet the vote reinforced their view that there would not be a chaotic and disorderly “no-deal” departure.
And the unit extended gains Wednesday as Conservative leader May survived a no-confidence vote that was called by Jeremy Corbyn of the main opposition Labour party.
Conservative MPs, with the vital help of Northern Irish allies in the Democratic Union Party, rallied behind May — and her government won by 325 to 306 to avert the threat of a general election.
Some dealers are now betting that another referendum or an extension of the time-frame for Britain to negotiate the terms of divorce with the EU might be more likely than no-deal.
“Parliament may soon be forced to come together to prevent the one thing there is a majority for ? stopping a painful no-deal Brexit,” cautioned analyst JR Zhou at Infinox.
The pound nudged slightly lower early Thursday as May scrambled to swiftly assemble a new Brexit strategy in cross-party talks, but recovered later in the European session.
The pound sat at $1.2989 in Asia, while the European single currency stood at 87.74 pence per euro.
May reached out to rival parties shortly after winning the no-confidence vote — but Corbyn has rejected the overture until she rules out the possibility of crashing out with no agreement.
Britain, the world’s fifth-biggest economy, splits from its main trading partner at midnight on March 29.
– ‘Time is running out’ –
“Whatever happens over the next few days, time is running out,” warned ING analysts James Smith and Petr Krpata in a research note to clients.
And markets have not yet factored in the possibility of another general election — which could send the pound sliding once more.
“The additional uncertainty a snap general election would bring is one event risk which still has the potential to significantly weaken the pound in the near-term,” added MUFG analysts.
“Market participants will find it difficult to stomach the additional risk of a left leaning Labour government alongside current heightened Brexit uncertainty.
“If a snap general election is called, we believe the pound could fall by around 3.0-5.0 percent.”
Since the referendum, the sharp drop in sterling has made imported goods more expensive, and therefore pushed up UK annual inflation and prompted many consumers to tighten their belts.