The pound rebounded further Wednesday, but gains were capped by investor anxiety after Brexit turmoil sent the currency tumbling and set the stage for a potential snap UK election next month.
Having dived Tuesday to $1.1959 — the pound’s weakest level since 1985 except for a 2016 “flash crash” — it has since rallied on rising hopes that Britain will not exit the European Union without a deal.
The pound shot back above $1.22 Wednesday, an increase of one percent from late Tuesday.
“Sterling was thrown a lifeline by a parliament determined to avoid a no-deal Brexit,” said analyst Connor Campbell at trading firm Spreadex, but he also injected a note of caution.
“The complicating factor here, and the reason that sterling’s gains… are not even greater is the potential for a general election.”
Prime Minister Boris Johnson headed into a fresh Brexit showdown in parliament on Wednesday after being dealt a stinging defeat over his promise to get Britain out of the EU at any cost next month.
The Conservative leader has threatened to seek an early general election if lawmakers vote against him again on Wednesday and force him to seek a three-month Brexit extension from Brussels.
Many economists argue that a no-deal departure would hammer the British economy, which risks already falling into recession this quarter.
British business activity shrank in August, slammed by weakness in the key construction, manufacturing and services sectors, a key survey showed Wednesday.
The purchasing managers’ index (PMI) for all UK sectors dropped to 49.7 from 50.3 in July, according to IHS Markit, which compiles the data.
A figure below 50 indicates contraction.
“The PMI surveys are so far indicating a 0.1-percent contraction of GDP in the third quarter,” which would mean Britain had fallen into recession, noted Chris Williamson, chief business economist at IHS Markit.
Britain’s economy unexpectedly shrank in the second quarter of the year.
The official definition of a recession is two successive quarters of economic contraction.
Stocks gain ground
Elsewhere on Wednesday, equity investors brushed off US President Donald Trump’s latest China outburst to push Asian and European equity markets higher.
Trump threatened China that if it did not move quicker in negotiations it would get a worse trade deal from him if he won the 2020 election.
Asian markets rose, led by a surge in Hong Kong after reports said the city’s leader was considering agreeing to a key demand of pro-democracy protesters, fuelling hopes for an end to months of damaging protests in the financial hub.
Shares rallied across the board on the Hang Seng Index after the reports, with property and retail firms among the best performers, having taken a hiding over the past few weeks as the demonstrations were increasingly marred by violence.
Chief Executive Carrie Lam and Beijing have so far refused to make any concessions to the protesters beyond agreeing to suspend a loathed extradition bill, a move that fell far short of demands to permanently shelve it.
Key figures around 1100 GMT
Pound/dollar: UP at $1.2204 from $1.2081 at 2100 GMT
Euro/pound: DOWN at 90.30 pence from 90.83 pence
Euro/dollar: UP at $1.1015 from $1.0974
Dollar/yen: UP at 106.19 yen from 105.94 yen
London – FTSE 100: UP 0.3 percent at 7,291.89 points
Frankfurt – DAX 30: UP 0.9 percent at 12,018.12
Paris – CAC 40: UP 1.0 percent at 5,519.42
EURO STOXX 50: UP 0.7 percent at 3,445.74
Hong Kong – Hang Seng: UP 3.9 percent at 26,523.23 (close)
Shanghai – Composite: UP 0.9 percent at 2,957.41 (close)
Tokyo – Nikkei 225: UP 0.1 at 20,649.14 (close)
New York – Dow: DOWN 1.1 percent at 26,118.02 (close)
Brent North Sea crude: UP 39 cents at $58.64 per barrel
West Texas Intermediate: UP 48 cents at $54.42