British pound runs Brexit gauntlet

19th January, 2019 10:09:34 printer

LONDON: 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, reports AFP.

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.

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.