Sterling weakened again on Thursday as pressure mounted on Prime Minister Theresa May to name a date for her departure after a backlash over her last-ditch plans for Britain’s exit from the European Union.
May’s final attempt to get colleagues’ backing for a divorce deal triggered a revolt on Wednesday by some of her Brexit-supporting ministers, deepening political uncertainty in Britain and sparking another round of selling of the pound.
House of Commons leader Andrea Leadsom has resigned and there was speculation other ministers could follow.
“In our forecasts, we assume that political risk will rise near-term, with a leadership challenge and the consequent risk that you get a more eurosceptic prime minister and consequently then, the risk of a no-deal Brexit rising,” said BNP Paribas’ G10 FX strategist Parisha Saimbi.
Saimbi said the bank had raised its probability forecast for a no-deal Brexit to 40% from 20%. Analysts say the risk of Britain and the EU breaking apart without a deal is rising, an event many economists say would greatly harm their economies.
The pound dropped 0.4% to a new 4-1/2 month low of $1.2605, before recovering some of those losses. It is the worst performing major currency in May, and so far has lost more than 3% of its value against the dollar.
Sterling fell 0.1% to 88.145 pence against the euro. The pound on Wednesday suffered its 13th consecutive day of losses against the single currency, its longest losing streak on record.
Nearly three years after Britain voted 52% to 48% to leave the EU, it remains unclear how, when or even if it will leave the club it joined in 1973. The current deadline to leave is Oct. 31.
When May departs, her Conservative Party will elect a leader who is likely to want to renegotiate the deal the prime minister agreed with the EU in November, raising the chances of a confrontation with the bloc. The bookmakers’ favourite to succeed May is Boris Johnson, who has said he wants a more decisive split.
“What comes next is wholly uncertain, but most likely market pricing of a no deal Brexit will increase this summer. Despite thirteen consecutive days of decline against the EUR, GBP still remains fragile. Cable remains on course for $1.25,” ING analysts said in a note.
British voters headed to the ballot box on Thursday for European parliamentary elections, and polling data puts Nigel Farage’s Brexit Party on course to win and May’s Conservatives to do very badly.
Volatility in the pound has ticked higher after a period of relative calm in the currency, although investors are not expecting any major price swings in the months ahead.
The newsflow has been one-way – negative – leading to gradual and consistent losses for the British currency rather than spikes upwards and downwards on various Brexit headlines, as investors experienced earlier this year.
“In the short term, we see a lot of risk and uncertainty,” said Florian Hense, senior economist for Europe at Berenberg.
