The pound fell on Tuesday as British Prime Minister Theresa May came under pressure to resolve the Brexit crisis by either calling an election or leaving the European Union without a deal.
Lawmakers’ failure to agree on an alternative plan to May’s withdrawal agreement has pushed Britain closer to a no-deal Brexit, the worst case scenario for sterling.
But the modest drop in sterling suggests that many investors still see a so-called “soft Brexit” as the most likely outcome.
The currency is trading around 1.3 dollar, its value for much of January.
“Sterling is displaying remarkable resilience despite another frustrating day in Westminster,” said Ricardo Evangelista, a senior analyst at ActivTrades.
“A no-deal scenario is likely to see the British pound dropping to 1.20 dollar, potentially 1.10 dollar,” he said.
Dampening prospects further, the European Union’s chief negotiator, Michel Barnier, said it would not re-negotiate May’s agreement.
Barnier said Britain’s parliament must find a majority for an option and that the EU would accept a customs union and a Norway-style relationship.
Sterling extended losses to touch 1.3025 dollar, down 0.6 per cent on the day. Against the euro, it dropped half a percent to 85.92 pence.
The deadlock has already delayed Brexit for two weeks beyond the planned exit date of March 29 and May is due to chair hours of cabinet meetings in Downing Street in a bid to find a way out of the maze.
Dismayed investors have been avoiding the pound resulting in a shortage in trading volumes which exacerbates price swings.
A key question is whether the most hard line Conservative eurosceptics and Northern Ireland’s DUP, the party propping up May’s government, can be convinced to back an exit deal before an April 12 deadline.
“With no progress in sight and a day closer to April 12th, the new Brexit date, we may see the pound staying pressured for a while more, as the risks for a no-deal Brexit happening by accident may have increased somewhat,” said Charalambos Pissouros, senior market analyst at JFD Group.
“We prefer to avoid drawing any conclusions with regards to the currency’s next trending path, as just a headline may be enough to change the whole picture.”