NEW YORK (Reuters) - Sterling dropped to a four-month low against the euro and a three-week trough versus the dollar as investors expected more Brexit challenges after Theresa May’s government only narrowly won a vote on a trade bill before the British parliament.
The British pound fell 0.8 percent versus the dollar to $1.3107, its worst daily showing since May 1. It also fell against the euro, which rose to a four-month high of 89.15 pence.
Sterling’s steep losses came after the government suffered an unexpected defeat on a separate amendment, which means the UK will now be required to secure an agreement that allows Britain to have continued participation in the European medicines regulatory framework.
But the pound cut those losses after the UK parliament in the end voted 307 to 301 against an amendment to trade legislation that would have required the government to try to negotiate a customs union arrangement with the European Union if, by Jan. 21, 2019, it had failed to negotiate a deal with the bloc that offered frictionless free trade for goods.
The narrow victory was British Prime Minister May’s third win this week.
Sireen Harajli, currency strategist at Mizuho in New York, said the UK government’s win on Tuesday was a short-term positive for the pound, but a medium-term negative for the currency because “this means that the UK will put forth a hard-Brexit plan which could make negotiations with the EU more difficult.”
The British prime minister narrowly won a vote on Monday after deciding to accept the demands of pro-Brexit lawmakers, stirring a rebellion among those who want to keep the closest possible ties in the European Union and highlighting deep divisions that have hampered progress in talks with Brussels.
May’s win on Tuesday, however, was positive for the short term “because, essentially, May is not going to be getting pushed back from the more hard Brexit camp within the conservative party,” Harajli said.
“It essentially means that, for now, Theresa May will not be facing a no-confidence vote,” she added.
Most traders believe Britain will avoid a so-called hard exit from the EU, in which trade ties are minimal, but the pound remains highly sensitive to political uncertainty and bearish sentiment.
Derivative markets, meanwhile, appear to be reflecting the growing caution on sterling’s outlook, with both one and three-month risk reversals - a ratio often used to gauge investors’ views on a currency - plummeting to one-year lows.
GRAPHIC - GBP valuations: reut.rs/2Jj20OH (This version corrects 2nd paragraph to show euro/sterling rose to a 4-month peak, not a one-week high)
Editing by Hugh Lawson and Nick Zieminski