Sterling recovered from its sell-off in the wake of the British parliament’s Brexit votes, as investors bet the UK government would still avoid exiting the EU without an agreed trade deal in place.
The UK currency had initially slid 0.7% after MPs voted to demand prime minister Theresa May renegotiate the terms of Brexit she had struck only weeks earlier with the EU but rejected an amendment that would have postponed Britain’s scheduled March 29 departure.
However, an amendment that stipulated averting a no-deal Brexit passed, and analysts said risks of a chaotic Brexit had risen only slightly. Goldman Sachs put the chances at 15% compared with an earlier 10% forecast.
Against the euro, sterling rose slightly to 87.42 pence on the belief that UK Labour Party leader Jeremy Corbyn will tell May to take a hard no-deal Brexit off the table.
The currency had gained before the vote, on expectations that parliament would approve a deal on time or would extend the Article 50 deadline. Analysts said not much had changed on that front.
“The market is still giving a very low probability to a no-deal,” said Sarah Hewin, chief Europe economist at Standard Chartered, which still sees chances of hard Brexit at 20%.
“The sense I get is people feel that is a negligible prospect,” she said. “But chances of an extension to Article 50 are rising. That probability is looking more likely than not with each day that goes by,” Ms Hewin said.
Analysts at BNP Paribas agreed, advising clients to stay long on sterling and seeing a Brexit delay as “inevitable”. The renewed uncertainty caused money markets to reduce expectations the Bank of England (BoE) would raise interest rates in 2019. The probability is now only a 52%, compared with 64% before the UK parliamentary vote on Tuesday night.
“The market is taking the view that as long as Brexit uncertainty persists it’s going to be difficult for the BoE to raise rates. As we are now in the realm of extending Article 50, it means uncertainty is also extended and that’s the rationale behind the pricing,” Ms Hewin said.
Darren McKillen, senior equity analyst at Cantor Fitzgerald, said there had been “no significant pattern” in the buying or selling of Irish shares in the wake of the vote.
That suggested there would be no crash-out Brexit and markets were waiting for “the next signal”, Mr McKillen said. A number of Irish shares which are exposed to earnings from the UK are closely watched for any effects of sterling slumping from a Brexit fallout. Earnings generated in Britain can be unprofitable if sterling were to fall again sharply.
Chris Beauchamp, chief market analyst at broker IG, said the UK shares tapped into some sort of relief rally. But he again warned that currency and stock markets want to see progress soon.
“Sterling seems unperturbed by the apparently impossible task facing Theresa May. The PM might have some kind of backing from her party to go back into the lions’ den, but it is far from clear whether they have given her any effective weaponry with which to win more compromises from the EU,” Mr Beauchamp said.
He added: “The relief surrounding the gradual disappearance of no deal... can only last so long, and markets will want to see progress on a different deal sooner or later.”