Brexit turmoil pushes pound down

The pound was whipsawed by political turmoil on Tuesday as UK Prime Minister Boris Johnson suffered a parliamentary revolt aimed at preventing Britain from leaving the European Union without a deal to protect the economy.

In early London trading, sterling had dropped below $1.20 to its lowest level in nearly three years amid growing uncertainty about the future of Brexit and talk of a third UK general election in four years. The currency fell as much as 0.9% to $1.196, the weakest it’s been since a mystery flash crash occurred in October 2016.

It then recovered strongly to trade at $1.209 during the evening after opposition MPs and 21 rebel Conservative lawmakers won a vote that gives them a chance to legislate to prevent Johnson from taking the UK out of the European Union without a deal on October 31.

Johnson has promised to enact Brexit by the end of next month whether he’s secured a deal with EU leaders or not. Opposition lawmakers and some members of his own party worry that leaving without a deal will cause huge damage to the British economy.

Lawmakers succeeded Tuesday night in taking control of the parliamentary agenda so they can attempt to pass legislation outlawing a “no deal” Brexit, unless it is approved by a subsequent vote in parliament.

But Johnson responded to his government’s defeat by saying he would attempt to call an early election. UK media reported Monday that an election could be held on October 14.

Election impact

Some investors fear that a snap election would only heighten the chaos. The outcome could embolden Johnson to pursue his hardline approach to Brexit, or elevate Labour leader Jeremy Corbyn, whose leftist policies could hit asset prices, the thinking goes.

Others view an election more favorably. Deutsche Bank strategist Oliver Harvey said in a note Tuesday that an election would be the “least worst of all scenarios this week,” and would reduce the prospect of the UK crashing out of the European Union without a deal.

Concerns about a Corbyn government “may be overstated,” Harvey said. Labour policies would be temporary and reversible, as opposed to the “permanent shock caused by a no deal Brexit,” he wrote.

Besides, Labour would have limited ability to enact policies that could hurt markets because current polling suggests it would not win an outright majority, and would need the support of other parties in Parliament.

Economy in trouble

Uncertainty about Britain’s future relationship with the European Union — its biggest trading partner — is already weighing heavily on the economy. UK manufacturing data released earlier this week indicated that the sector contracted at its fastest pace in more than seven years. Retail sales data for the month also disappointed.

The UK’s budget watchdog has warned that leaving the EU without a Brexit deal will plunge the country into a recession. The UN trade agency UNCTAD warned Tuesday that Britain could lose at least 7% of its exports to the European Union.

The British economy contracted in the second quarter of the year due to manufacturing weakness and the unwinding of stockpiles built up before an earlier Brexit deadline.

“Recent developments have left sterling traders with little to be optimistic about,” said Craig Erlam, senior market analyst at Oanda, a foreign exchange trading firm. He predicts more volatility ahead.