LONDON (Reuters) - The pound fell on Thursday as the dollar strengthened and relief about British Conservative lawmakers backing Prime Minister Theresa May’s Brexit strategy gave way to fresh fears about the risk of a no-deal UK departure from the European Union.
The prospect of politics scuppering a divorce deal has weakened sterling in recent days.
May received a show of support from her parliamentary party on Wednesday, dampening fears of an immediate challenge to her leadership, but this lifted sterling only briefly.
By 1310 GMT the pound was down half a percent versus the dollar at $1.2808, a seven-week low, and down 0.4 percent against the euro to 88.82 pence, its weakest in three weeks.
European Central Bank President Mario Draghi said on Thursday the longer Brexit talks drag on, the more the private sector will have to prepare for the possibility of Britain crashing out without a deal.
Investors said they saw no specific driver for the fall in sterling but cited broad-based dollar strength and said that with just over five months until Britain exits the EU the chances of a no-deal outcome were rising.
“Domestic politics have flared up again and the cumbersome dynamics will make it challenging for May to get an eventual deal through the UK Parliament,” said Alexandra Dumitru, an economist at Rabobank.
“We still regard a last-minute deal as the most likely outcome but due to recent events we now estimate the chances of a ‘hard Brexit’ as almost as high as the base case.”
Disagreement over a fallback plan for the border between the British province of Northern Ireland and EU member state Ireland is the major sticking point in the Brexit talks.
“If May was toppled the pound would see a wave of selling in the short term because her replacement could increase the chances of a no-deal Brexit,” said David Cheetham, chief market analyst at broker XTB.
But the pound “remains more sensitive to good news than bad which may mean a fairly sharp move higher should a (Brexit) agreement be reached.”
Reporting by Tom Finn; Editing by Mark Heinrich and David Stamp