(Update) The pound rose after the government’s Brexit deal suffered an historic defeat in the House of Commons with investors assessing the implications and awaiting further political developments.
Having slipped to a low on Tuesday of $1.27 against the dollar, sterling jumped over a cent to $1.2866 - where it remains today - after Theresa’s May EU withdrawal plan was rejected by 432 votes to 202 and Labour tabled a vote of no confidence in her administration.
Trading in the pound steadied on Wednesday after a fall in inflation to 2.1% removed further pressure on the Bank of England to raise interest rates. On the stock market, the blue chip FTSE 100 index fell but the more domestic 'mid cap' FTSE 250 rose on hopes of a softer Brexit.
Sterling remains nearly 8% below its level of $1.4878 against the dollar before the EU referendum on 23 June 2016.
The pound also rallied close to a two-month high against the euro with the single currency trading at one euro to 88.6p.
‘I wouldn’t put much weight on these very short-term moves. The market is waiting,’ Mark Carney, Bank of England governor, told MPs in a regular hearing, according to a Reuters report.
Currency experts agreed. David Cheetham of online broker xtb said May’s insistence that she was not seeking to run down the clock and wanted the UK to leave the EU in an ‘orderly fashion’ had provided some comfort in a highly uncertain market.
‘Traders are seemingly taking the outcome as paving the way for an extension of the Article 50 deadline, rather than increasing the chances of a no-deal Brexit and this has caused the recovery seen in the pound.’
However, Neil Wilson of markets.com advised caution against interpreting the rise as sterling was still off its session highs. ‘We need to look for a rally above 1.29 and then 1.30 for anything meaningful - at the moment this just a load of skirmishes around the range that cable has traded in for some weeks.’
Stephanie Kelly, political economist at Aberdeen Standard Investments, said this evening's vote of no confidence could lead markets to price in the possibility of Labour’s softer Brexit position, which would support the pound, but that investors would worry about the opposition’s plans to nationalise the water companies.
‘I’d expect sterling to be volatile until the result of the no-confidence vote is known. With the DUP [Democratic Unionist Party] saying they’ll back the Conservatives, the no-confidence vote is dead in the water unless there is a big rebellion within the Conservative party,’ Kellly said.
The Association of British Insurers was alarmed by the result. ABI director general Huw Evans urged all parties to avoid a no-deal. ‘This is uncharted territory and we face a period of unprecedented uncertainty.
‘It is critical that the government, Parliament and the EU work together to avoid an outcome that would be bad for our economies and bad for our customers,’ he said.