The pound turned positive against the dollar and euro on Tuesday after Boris Johnson lost his majority in parliament.
Conservative MP Philip Lee defected to the Liberal Democrats by publicly crossing the floor of the House of Commons on Tuesday afternoon. Lee said in a statement that he could no longer serve as a Conservative MP because the party “has increasingly become infected with the twin diseases of populism and English nationalism.”
The defection means the Conservative party has lost its majority of one in parliament and is now a minority government. The pound rose on the news as investors and traders reasoned that the change in parliamentary arithmetic makes a no-deal Brexit less likely.
“Some investor feel the chances of a no-deal Brexit are lower,” Garry White, chief investment commentator at Charles Stanley, said. “Whether they are right or not remains to be seen. Personally, I think no-deal is more likely.”
At 4.15pm, sterling was up 0.1% against the euro to €1.102 (GBPEUR=X) and up 0.1% against the dollar to $1.2085 (GBPUSD=X). Earlier in the day the pound was suffering heavy losses against both currencies and trading at a 34-year low.
MPs are set to vote at 10pm tonight on a proposal that could force a delay in the Brexit deadline to early 2020.
“Over the course of the next few days, when the government is facing possible defeat in a Bill that could delay Brexit again, a lost majority is a positive for Remainer MPs/opponents of ‘no-deal’,” Ken Odeluga, a market analyst at City Index, said.
“But if the government’s lost majority inclines Prime Minister Boris Johnson even closer to calling a general election — something he’s suggested he could do if MPs block no-deal — sterling pressure should rise further.
“As such, any near-term bounce was always likely to be dicey. The government’s lost majority might ensure the pound’s recovery is a short one.”
Connor Campbell, a financial analyst at SpreadEx, said: “Wednesday could see another nasty bout of volatility.”
Despite the slight rise on Tuesday afternoon, the pound remains near multi-year lows.
“Basically, it's a tightrope act to predict whether a no-deal scenario might be avoided at the very last minute,” Marc-André Fongern, an FX & Macro Strategist at MAF Global Forex, said. “This omnipresent uncertainty is, in my view, the most significant burden on the pound sterling.”