Sterling suffered its worst day in a month as fears grew that the border issue and disagreements within the Tories over Brexit would see UK prime minister Theresa May face a serious challenge to her leadership.
However, a bid by MP Steve Baker, a leading Conservative Brexiteer, to sabotage Brexit negotiations, was withdrawn.
He had wanted to table amendments with the support of the Democratic Unionist Party to a bill that would have required Stormont, which is currently suspended, to approve anything that would treat the North differently from the rest of the UK.
He announced on Twitter that he was withdrawing his amendments but not before the news had further troubled sterling. Against sterling, the euro rose about 0.3% to 88.5 pence at one stage.
Prime Minister May told MPs that most of the work in the Brexit talks with the EU, apart from the Irish border, had been completed.
“(The DUP report) is just reinforcing the negative sentiment towards the pound. On the weekend, we saw increasing concern over political instability in the UK and the threat of another leadership challenge back on the table,” said Lee Hardman, FX strategist at MUFG in London.
Mr Hardman said he still expected a deal eventually to be struck over Brexit but added: “The path to a deal seems to have become a bit harder.”
“(The leadership challenge issue) is hanging over sterling, which is (also) waiting for another steer on Brexit, likely from this address from May today,” Investec economist Victoria Clarke said.
Late last week, Brexit optimism, along with a paring of dollar long positions, saw short sterling bets fall, calculations by Reuters and the Commodity Futures Trading Commission showed.
But analysts at Nomura said they were taking profit on long sterling positions, noting the risks in the short term.
“Despite our view that a leadership confidence vote on May is no more than hyped-up tail risk, we admit the Conservative party has never looked closer to triggering such action as it does today,” Nomura said, noting that centrist Tories, as well as Brexiteers, were disgruntled with the direction of Brexit policy.
“The pound skidded lower across the board as pressure mounts on growing domestic and international political risk. Pressure was mounting on Theresa May following her willingness to consider the extension of the Brexit transition period,” said Fiona Cincotta, senior market analyst at City Index.
She said: “A potential leadership challenge is an imminent and growing risk for the pound, one that could prevent sterling from venturing much beyond $1.30 over the coming sessions. This is not the first time that the pound has tumbled on concerns that the PM won’t make it to the finish line. However, it is an extremely risky strategy to oust the PM at this late stage in Brexit talks and this could prove to be her only solace.”
In her speech, Ms May reiterated her promise to unilaterally guarantee the rights of EU citizens living in Britain to remain, even if she fails to get a Brexit deal.
“In the statement, I made after Salzburg I made clear that in a no-deal situation we will guarantee the rights of EU citizens,” she said.
That’s not quite enough for businesses and EU citizens, who want a firm legal guarantee instead.
Irish Examiner, Reuters, and Bloomberg staff.