Sterling recovered from 20-month lows on Wednesday as Prime Minister Theresa May vowed to fight an attempt to unseat her and warned hardline eurosceptic colleagues that they risked delaying or even stopping Britain’s departure from the European Union.
At least 158 of May’s Conservative party colleagues publicly indicated support for her before a no-confidence vote on Wednesday, enough for a simple majority.
Should she win by a large margin, analysts think May can isolate opponents in her party who seek a total break from the European Union, making a soft Brexit more likely.
On the other hand, a loss, or a win by a small margin, would leave May’s campaign for her much-criticised plan reeling, less than four months before Britain is supposed to quit the EU on March 29.
The pound tanked to 20-month lows overnight after May aborted a planned parliamentary vote on her plan on Monday. Then colleagues gathered enough support to trigger a no-confidence vote in her leadership.
“Even though there’s tremendous uncertainty and we’ve reached a low in Britain’s institutional crisis, we’re a touch positive on the pound,” said Giuseppe Sersale, a Milan-based fund manager at Anthilia Capital.
“We don’t expect anyone will want to take responsibility for a hard Brexit and we think the worst-case scenario can be avoided,” he said.
As scores of colleagues pledged support for May, the pound extended gains to $1.2621, up 1.1 percent, from below $1.25 earlier in the session. The currency was on course for its biggest one-day gain in six weeks.
Against the euro, sterling rose 0.7 percent to a session high of 89.92 pence.
Analysts at Nomura said they expected May to survive the vote because it had taken a long time for opponents to get the 48 letters needed to trigger a ballot.
Others were less confident, with those at MUFG saying there was “a high probability” of defeat.
The British currency was also boosted when German Chancellor Angela Merkel said she had used Tuesday’s discussion with May to work on an orderly process for Brexit.
CAPITAL FLIGHT
Traders warned of more volatility for sterling regardless of the outcome.
Investors have been reluctant to predict directional moves in the pound as the political instability deepened, preferring instead to bet on rising volatility. Price swings in sterling have this year exceeded some high-stakes emerging markets.
A range of Brexit outcomes remains possible, from a second referendum to a no-deal Brexit to a delayed Brexit.
Should a so-called hard Brexiteer opposed to May’s deal lead the country, or parliament vote for a disorderly Brexit, the pound could lose 5 percent as the focus turned to “potential capital flight” from Britain, said John Normand, a strategist at JP Morgan.
Should she cling to power, May will seek a parliamentary mandate for her deal, probably before Jan. 21.
She is meeting EU leaders this week to get her Brexit withdrawal agreement tweaked to persuade colleagues angry that the deal, in their view, would leave Britain worse off overall.
