The pound fell to a six-week low on Wednesday before British Prime Minister Theresa May was due to meet Conservative Party lawmakers, some of whom have discussed toppling her in anger at her Brexit negotiations.
May is seeking to win over lawmakers in her party, who oppose her approach to Brexit negotiations, stuck at an impasse just over five months before the United Kingdom leaves the European Union.
The prospect of a leadership challenge and of politics scuppering an agreement with the EU has weakened the currency in recent days.
The sterling fell on Wednesday to $1.29, its lowest since Sept. 10, and traded down half a per cent. Against a weaker euro, the pound was flat at 88.31 pence.
“Sterling (traders) are parsing the words coming out of Westminster and Brussels but the issue is that the range of final outcomes is very broad,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.
“We are still stuck in the $1.28 to 1.32 range. The answer for investors is to stay close to benchmark or slightly short,” he said.
A disagreement on a fallback plan for the border between Northern Ireland and Ireland is a key sticking point.
The Times on Wednesday reported that a transition phase could be rolled over annually if needed – effectively leaving the UK in an open-ended Norway-style relationship with the EU.
“May’s position is similar to that of the pound in that it seems to be carrying on despite the sizable challenges faced,” said David Cheetham, chief market analyst at broker XTB.
If May was toppled the pound would see a wave of selling in the short-term since her replacement could increase the chances of a no-deal Brexit, Cheetham added.
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.”
The sterling briefly gained half a per cent against the dollar and euro on Tuesday after a media report that the EU could offer May a UK-wide customs union to clinch a Brexit deal.
