Sterling found a measure of support on Tuesday following a sharp sell-off in the previous session after an unexpected decision by the British prime minister to delay a key vote on Brexit.
The pound ticked up 0.1 per cent in European trade to $1.2607 in, leaving it near its weakest level in more than a year and a half. Against the euro, sterling was also up at €1.1084.
The currency fell as much as 1.7 per cent against the dollar on Monday after Theresa May surprised the market by ditching a parliamentary vote on her Brexit plan that had been scheduled for Tuesday, admitting she was facing defeat by a "significant margin".
Retreat
The UK stock market also retreated in response, with the FTSE 100 closing down 0.8 per cent on Monday. According to futures trade, the main London index was expected to regain 0.6 per cent at Tuesday’s open.
Official unemployment and average earnings figures for the UK due out today will test the mood. Data on Monday showed that UK economic growth slowed in the third quarter also undermined sentiment toward the pound, coming alongside renewed questions over Brexit.
Analysts are now expecting further pressure on the currency given the uncertainty over the UK’s blueprint and timeline for Brexit.
Mrs May did not clarify whether she would bring an altered deal back to Westminster before the end of the year, meaning the process could drag further into next year. The possibility of a “ no-deal” Brexit would be heightened if MPs do not back the plan.
John Higgins, chief markets economist at Capital Economics, said “sterling will almost certainly come under some more pressure in the near term if there is a ‘no deal’ Brexit”.
But he said that “even if there is a ‘no-deal’ Brexit, we would be surprised if sterling fell a long way below its level now of around $1.25”. Other scenarios, such as a second referendum, could support the currency, he added.
The delay to the vote “is perhaps just another step towards a second referendum”, said Charles Hepworth, an investment director at fund manager GAM, as “we cannot see another way for this purgatory that the UK inadvertently voted for to end”.
Risks
Jordan Rochester, analyst at Nomura, said "procrastination risks" of parliament's vote sliding toward Christmas and into 2019 were rising, adding: "The market will not take those extra weeks of uncertainty well.
“Outside of Brexit we have to recognise that risk sentiment is dire, this is not a global backdrop where sterling, a current account deficit currency, would naturally do well without a positive domestic story to back it.”
Meanwhile, there were signs that sterling’s decline has caught the attention of international property investors. Global estate agents have reported increasing activity from overseas buyers.
“We have already seen significant interest from American buyers who are eyeing up the favourable dollar to sterling exchange rate,” said Guy Bradshaw, head of residential sales at UK Sotheby’s International Realty.
Still, he added that the uncertainty over Brexit means that “buyers are going to be increasingly adopting a wait-and-see approach. . . The biggest winners at the moment are those buyers eyeing up London property from overseas.” – Copyright The Financial Times Limited 2018
