Sterling fell back amid uncertainty over whether British parliamentary votes on Tuesday will make it less or more likely the UK crashes out of the EU.
Over the last two and half years, the pound has been a barometer of increasing concerns that Britain would leave the EU without a deal at the end of March.
However, it rose strongly last week on the belief that MPs were manoeuvering ahead of Tuesday's votes to prevent a no-deal Brexit, but concerns remain at an elevated level.
Philip O’Sullivan, chief economist at Investec Ireland, said that the outcome was “very fluid”. Some profit-taking on last week’s gains may be behind Monday’s weakness for the UK currency, he added.
Sterling traded slightly lower against the dollar, at $1.3158 and traded at 86.89 pence against the euro. The Ftse-100 index of leading shares in London fell almost 1%, while the Iseq index in Dublin eased only slightly. Bank of Ireland shares made further gains however, despite the uncertainty over the looming Brexit votes in the Commons.
The bank has a significant lending operation in Britain and, along with other Irish bank stocks, performed badly in 2018 as Brexit tensions ratcheted higher.
“The Brexit pathway looks just as uncertain as ever despite the UK being just two months from a messy exit from the EU,” said Joshua Mahony, senior market analyst at online broker IG.
“Tuesday's parliamentary vote is less about Theresa May’s plan, and more about the possibility of altering the playing field for the PM,” he said. Capital Economics in London cautioned stock market investors who are anticipating significant long term gains for Ftse-100 shares if a no-deal Brexit is ruled out. The Ftse-100 has been boosted in the past as sterling fell against the dollar because so many of its constituent companies are multinationals whose overseas earnings are boosted when translated into a weak sterling. But Capital Economics chief markets economist, John Higgins, said that any good news for the Ftse-100 may be shortlived.
“We think that this will be another tough year for the Ftse-100, even if the outcome of negotiations over Brexit is favourable for the UK economy. Our forecast is that the index will finish 2019 at 6,400, which is about 5% below its level now. The key reason is our pessimistic view of the stock market in the US,” Mr Higgins said.
He said: “While there are myriad ways in which Brexit could yet play out, we doubt that the UK will leave the EU without a deal on March 29.
“If, as seems likely, investors viewed the alternative outcome as favourable for the UK economy, the Ftse-100 could get a boost. But we suspect that it would be at least partly offset by a further rise in sterling against the dollar.”
The pound is already on track for its biggest monthly rise against the dollar in a year as markets see a diminishing risk that Britain will leave the EU on March 29 without an agreement on future relations in place. After the UK parliament rejected prime minister May’s withdrawal agreement on January 15, some MPs are seeking to delay Brexit by extending the Article 50 negotiating period, and others trying to give parliament greater control.
A no-deal Brexit is by no means ruled out, but the risk is seen as low — Goldman Sachs, for instance, puts it at 10%.