Sterling pulled back from its highs on Wednesday evening as UK prime minister Theresa May won a vote of confidence among members of her own Conservative Party.
Tory members of parliament voted by a majority of 200 to 117 in support of Ms May in a secret ballot that took place over the course of two hours to 8pm in London.
Earlier in the day, the value of the British currency rallied as currency markets investors bet that Mrs May would succeed in fending off political pressure from members of her party and remain leader.
Conclusion
Sterling had been trading up 1.22 per cent against the dollar, at $1.2637, immediately before the result emerged. Its gains were scaled back to 0.92 per cent within 10 minutes of the announcement. The UK currency’s rally against the euro eased back to 0.49 per cent to 90.17p from 0.73 per cent.
Commenting on the vote David Lamb, head of Dealing at the forex specialists Fexco Corporate Payments, said: : “At the eleventh hour, Theresa May’s opponents blinked first. But Mrs May’s victory has come at a dreadful cost. Her authority - already on its last legs - has been fatally wounded by the scale of the rebellion.
"The markets have drawn two stark conclusions – the prime minister is a lame duck and the Brexit process is back where it was on Monday morning. Both of which beg the question - if she couldn't get her Brexit deal through parliament on Monday, what hope now?
“Short of some miraculous and unexpected concessions from Brussels, the Brexit process has been catapulted back into limbo, with the clock running down fast.
“Sterling recovered during Wednesday as the markets bet – correctly – that Mrs May would survive the confidence vote. Now she has the grim realisation that Britain is racing towards a ‘no deal’ Brexit has sent the Pound drifting back towards the nadirs seen earlier in the week. Sterling, like Brexit, hangs in the balance.”
Traders said that sterling is likely to remain volatile over the near term, as it remains uncertain whether the UK prime minister has enough support in parliament to pass her EU withdrawal agreement with Brussels, struck last month. The UK is set to leave the EU at the end of March.
Sterling dropped to a 21-month low against the US dollar on Monday after the UK premier said her government would delay a vote in the House of Commons on the withdrawal accord, which had been scheduled for the following day. She claimed at the time that while there was broad backing for her deal, the issue of the Northern Ireland backstop meant that she would be unable to get it through parliament.
Support
Mrs May won support from senior allies in her government on Wednesday after the chairman of the so-called 1922 Committee of Tory backbenchers, Graham Brady, revealed he had received enough letters from party members to trigger a ballot.
These included figures such as foreign secretary Jeremy Hunt and pensions secretary Amber Rudd, who would have been considered leadership rivals. In surviving a no confidence vote, she cannot face a similar vote for 12 months.
Addressing members of her party before the vote, Mrs May conceded that she does not plan to lead Conservatives in the UK’s next general election, which is scheduled to take place in 2022. She said that there would not be a snap election.
Ms May told colleagues that she wanted to return by January 21st with something, following discussions with other EU leaders, on the Northern Ireland backstop that would secure its passage through parliament.
Irish bonds are also sharing Mrs May’s pain.
The Republic’s securities underperformed all their euro-area peers on Wednesday amid the political turmoil in our biggest trading partner. The correlation between Irish bond yields and pessimism in sterling, reflected through currency options, is getting stronger as Brexit fears grow, according to Mizuho International.
“The pain in Irish bonds is called Brexit,” said Antoine Bouvet, a rates strategist at Mizuho.
Irish five-year bond yields climbed 0.04 percentage points to 0 per cent as of mid-morning in London, taking their spread over German peers to 28 basis points, the highest level since May. That comes as the National Treasury Management Agency is due to announce its 2019 funding plans soon.
