Pound surges on expectation Tory coup to oust prime minister would fail
The pound rose against both the euro and the dollar yesterday as early reports suggested that British Prime Minister Theresa May would easily defeat a move to depose her.
Sterling rose 0.7pc to 89.92 pence to the euro before the vote took place.
The pound pulled back from session highs last night after Mrs May survived the no-confidence vote.
Mrs May won the confidence vote by 200 votes to 117 last night. The win could produce more gains for the pound, though these are likely to be modest and temporary.
Sterling jumped as high as $1.2672 as the result came in but then fell to $1.2605, up 1pc on the day after the number of lawmakers that had voted against Mrs May was announced.
Mrs May will still have to put her withdrawal agreement to parliament, where it would likely be voted down, investment bank ING said.
Britain's European partners have said they will not make any changes to the withdrawal agreement, which means Mrs May stands no chance of winning over Brexit hardliners.
Investment advisory firm Capital Economics noted that while the pound had weakened against the dollar on the news that the Brexit vote would be pulled, it fell far more sharply after the Speaker of the House of Commons John Bercow rebuked the government, and on the reports on the evening of an imminent leadership challenge.
"This perhaps suggests that markets are more worried about paralysis than a particular Brexit outcome. With further political chaos on the way, we would not be surprised if sterling comes under more pressure in the near term," said Ruth Gregory, the group's senior UK economist.
While the odds looked stacked in Mrs May's favour, the high risks associated with a different prime minister who was more willing to accept the risks of a "hard Brexit" would hit the pound hard, ING noted.
"The pound is trading on exceptionally high volatility at the moment and a rudderless UK government at this vulnerable time could see the Bank of England's Broad Sterling Trade Weighted Index fall back to the lows seen in 2008 and 2016 - effectively a 3pc decline from current levels."
Shares in London rallied on expectations that the prime minister would survive, with the FTSE 100 gaining 1.2pc. Yields on British government bonds rose, with the 10-year gilt yield rising six basis points to 1.25pc.
Brexit has started to weigh on the British economy and expectations in financial markets are that the Bank of England will loosen monetary policy if there is a cliff-edge Brexit on March 29 so as to try and cushion the economy.
Irish shares posted a modest gain, adding 0.57pc by the close of trading, although even a negotiated exit would still hit the economy here hard.
The ESRI yesterday warned that a no-deal Brexit would hit growth hard, while also cautioning that the Government must take action on overspending.