LONDON: Sterling was stuck near one-month lows on Thursday after Prime Minister Theresa May lost a symbolic Brexit vote in parliament, weakening her hand as she seeks to renegotiate her withdrawal agreement with Brussels.
The British currency was little moved after the result of the motion, which sought to reaffirm support for May’s plan to seek changes to her deal, after earlier tumbling on media reports that the government would lose.
Eurosceptic lawmakers in May’s own party had been expected to abstain or vote against May as they feared she was softening her position on a no-deal departure from the European Union.
Thursday’s defeat, while humiliating for the prime minister, will also further worry investors fearful that she cannot persuade lawmakers to back her agreement in a forthcoming vote, or convince Brussels to grant her some concessions.
She had lost her first attempt at seeking parliamentary approval by an even bigger margin.
With six weeks to go before Britain is due to leave the EU, markets are growing more anxious. Many traders are avoiding taking positions until a firm resolution on Brexit is secured.
Scotiabank analysts had said Thursday’s defeat “would be embarrassing for PM May but perhaps nothing more serious at this stage”.
The pound fell to US$1.2773, a one-month low, earlier on Thursday, but was trading around US$1.28 after the vote, down 0.4% on the day.
It fell more than 0.5% against the euro to 88.40 pence.
Commerzbank FX strategist Ulrich Leuchtmann, speaking before the parliamentary votes, said the fall in euro/sterling was down to broad-based dollar weakness rather than Brexit-related angst.
“The debate this week has been between the Fed pause or whether other central banks have become more dovish, and that is basically moving the US dollar,” he said.
Despite jumpy cash markets in sterling, currency derivative markets appeared somewhat relaxed on the near-term prospects for the pound.
Implied volatility – a measure of expected swings in the British currency – has fallen to a more-than-three-month low of nearly 10 vol compared to 14 vol in early December.
Positioning data indicates some degree of optimism on the currency.
Still, many traders are sitting on the sidelines as they face a plethora of possible Brexit outcomes, including a delay to the scheduled March 29 departure date – seen as increasingly likely by some investors – or even a second Brexit referendum.
The Guardian newspaper reported that up to 10 frontbench opposition Labour MPs have threatened to resign if party leader Jeremy Corbyn does not support a pro-referendum amendment.
If May did open the door to a second referendum, analysts say sterling would bounce significantly.