Pound rebounds as Johnson suffers major Brexit vote defeat

New York: The British pound hit multi-year lows against the dollar on Tuesday amid fears of a no-deal Brexit but rebounded as Prime Minister Boris Johnson lost a crucial parliamentary vote on his Brexit strategy.

“For all the uncertainty that lies ahead, markets see a Boris Johnson led no-deal Brexit as the worst-case scenario and thus treat anything that undermines that as pound positive,” said Joshua Mahony at IG.

Sterling struck $1.1959 in early European business, its worst trading level since 1985 with the exception of a 2016 “flash crash” which took it even lower for a very short moment.

But the British currency reversed course after the dramatic defection of a Conservative party member on Tuesday.

Later Tuesday evening, the House of Commons voted to allow MPs to have a vote on Wednesday that could force Johnson to ask the European Union for a three-month delay to Brexit if he does not manage to strike an agreement with Brussels by October 19.

The gyrations, which pave the way for possible early elections in Britain, came on a mostly weak day for global stocks, with Wall Street shares tumbling in the first session since new tariffs went into effect in the US-China trade war.

‘Plenty of pain’

“Though there is no doubt plenty of pain on the horizon, sterling managed to shake off the excesses of its Tuesday’s slide as the session went on,” said Connor Campbell at Spreadex.

The British leader insists that Britain will leave the EU with or without a deal on October 31.

Markets fear that a no-deal Brexit could be disastrous for the British economy, at least in the short term, and could plunge the country into recession.

While the pound’s weakness makes imports into Britain more expensive, for example oil which is traded in dollars, it cheapens exports.

Tuesday’s vote will clear time in the House of Commons on Wednesday to introduce legislation that could force Johnson to delay Brexit to January 31 if he cannot agree an EU deal by October 19.

Analysts acknowledged they could not see much upside for sterling in any likely scenario.

“It seems there is no good near-term outcome. We either have an increased risk of no-deal, the possibility of a Corbyn government or more uncertainty,” Craig Erlam, senior market analyst at Oanda trading group, told AFP on Tuesday.

“It would appear traders don’t view any of these options as being particularly favorable for the pound,” Erlam added.

Elsewhere, the Dow finished down 1.1 percent as new tariffs in the US-China trade war took effect, while US data pointed to contraction in American manufacturing.

CFRA Research’s Sam Stovall said hopes were dashed that the United States might delay as the tariffs as it has done at times in the past.

Stovall also pointed to hawkish commentary from US President Donald Trump against Beijing. On Twitter, the US president vowed China would face a “much tougher” deal if Trump is reelected in November 2020.

Investors “hoped there might be a postponement to allow the talks to go on,” Stovall said.

“But instead we heard an even greater threat towards China. That just caused investors to think, ‘Oh boy, here we go again.’”