Sterling edged higher in morning trading in Asia after rallying overnight as MPs backed a parliamentary manoeuvre designed to stop a no-deal Brexit, and EU chief negotiator Michel Barnier signalled openness to alternative arrangements at the Irish border.
The pound inched 0.1 per cent higher to $1.2555 on Friday morning, having climbed 1 per cent on Thursday to post its biggest one-day rise since early May.
The rally came after the House of Commons voted by a majority of 41 to support an esoteric manoeuvre intended to stop Boris Johnson, if he becomes prime minister, from suspending parliament in order to force through a no-deal exit from the EU in October.
In addition, markets were cheered by Mr Barnier’s comments in a recorded interview with the BBC that he was open to alternative plans to the so-called Irish backstop, the major sticking point between both sides, even as he warned that “the UK will have to face the consequences” if there was a damaging no-deal Brexit.
The pound had lost over 2 per cent since the start of July as political uncertainty surrounding the Brexit process continued to mount, with Tory leadership rivals Jeremy Hunt and Boris Johnson both hardening their stances on taking the UK out of the EU with or without a deal.
Analysts warned that the pound was likely to remain subject to the whims of British and European politics in the coming weeks.
In the month ahead, Petr Krpata, FX strategist at ING, said he expects headline news to continue to negatively impact sterling.
The likely confirmation of Boris Johnson as the next Conservative leader…next Tuesday won’t be helpful for the pound. The Conservative party conference in late September will also add pressure…with peak pressure building in October.
Adam Cole, chief currency strategist at RBC Capital Markets, cautioned that uncertainty may last well past October.
Firstly, even if parliament is sitting in October it is not clear it can find a mechanism to stop no deal exit, and if it did, it seems quite likely the government would fall anyway. Secondly, and possibly related to this…the joint probability of an election in 2019 or 2020 is still above 70 per cent and the outcome of a general election has never been more uncertain.
