Pound pummelled by parliamentary chaos over Brexit
Sterling hit after government loses three Commons votes
But some analysts see cause for optimism
The pound hit a new 2018 low versus the dollar after the government endured the worst performance in parliament since the 1970s.
After Theresa May lost three House of Commons votes on Tuesday evening, sterling dropped to a year's low of $1.2665 and again fell below $1.27 early on Wednesday before clambering back above that level as the morning wore on.
The government was defeated on two contempt of Parliament motions for not publishing the full legal advice on the withdrawal agreement and MPs also approved an amendment from Tory Dominic Grieve which aims to give them a greater say if May’s Brexit proposal is defeated during the meaningful vote next week.
The pound is in "death spiral mode", said market analyst Naeem Aslam at Think Markets as sterling broke below the critical level of 1.27 against the dollar, suggesting "the doors are wide open for the price to touch the level of 1.25 again" as the higher odds of no Brexit deal are creating more uncertainty among traders.
If the UK leaves the EU with no deal, the Bank of England and the Treasury has warned that the economy could crash into recession, with GDP tumbling 8%, the pound potentially falling to $1.22 and housing prices sliding as much as 30%.
Neil Wilson at Markets.com felt the pound was not quite moribund but certainly "on the ropes and [...] set for more falls as it seems all but certain Theresa May's government will fall".
"A vote of no confidence and fresh general election now seem certainties after a humiliating day in parliament. The spectre of a no-deal crash out looms, but equally there is building momentum behind a second referendum. In short this looks like a lot of short term trouble for GBP with a high risk of long term damage (no deal exit), but with rising possibility of long term salvation from a second referendum, which Remain would carry. Worse before it gets better is the mantra for sterling."
While the pound has found support at 1.2660, if that it broken cable could fall back to 1.2360 and then as low as 1.20, while a rise above 1.27 "could bring on some short term gains but it seems the upside is well and truly capped".
LOWER PROSPECTS OF NO DEAL BREXIT
There was optimism from analysts Derek Halpenny and Fritz Louw at MUFG said that perhaps the most significant event was the parliamentary support for the Grieve amendment, which ensures if the Brexit deal is voted down next week then parliament will have the opportunity to indicate the desired direction of travel.
This puts the government further at the mercy of MPs in parliament and, given the overwhelming opposition to a ‘no-deal’ Brexit, diminishes the prospect of a disorderly divorce.
"While a vote on the next direction Brexit should go in if the vote on Tuesday fails would not be legally binding, it would unprecedented for the government to ignore parliament. Diminished prospects of a ‘no-deal’ Brexit will help limit the appetite for selling the pound aggressively on fears of the UK crashing out of the EU with no deal."