The pound hovered on Tuesday as Labour signalled it could back UK prime minister Boris Johnson’s fresh bid to force a general election.
Johnson had hoped to head to the polls to break the political deadlock and get his new Brexit deal over the line, but the government fell 135 votes short of the two-thirds majority it needed in parliament on Monday evening.
The pound had dropped against the dollar (GBPUSD=X) in early trading in London after Johnson’s defeat, but recovered to trade flat at just over $1.28 at around 11am after Labour confirmed its plans.
It remains not far off five-month highs as fears fade of a no-deal Brexit.
But one sterling analyst said fresh uncertainty around an election meant the “balance of risks is now tilted to the downside.”
The prime minister is planning to go back to MPs again on Tuesday, conceding ground to opposition MPs by agreeing to drop key Brexit legislation ahead of the election.
The Scottish National party and Liberal Democrats have shown support for going to the polls, and could back Johnson’s new proposal on Tuesday which requires only a simple majority of MPs to pass.
But divisions remain over the timing of an election, with Johnson expected to ask again for a public vote on 12 December despite opposition parties’ preference for a 9 December poll.
The SNP’s Westminster leader Ian Blackford is also demanding a “cast-iron guarantee” Johnson will not attempt to push through his Brexit bill before the election.
It comes a day after the EU agreed to delay its Brexit deadline beyond this Thursday, shifting the last point Britain can leave the bloc to 31 January.
But the position agreed by European leaders on Monday has been dubbed a “flextension”, with the UK government able to take Britain out earlier if parliament approves a deal before that date.
Michael Brown, a senior analyst at Caxton, said sterling had “held firm” on Monday when the extension was granted, but said the defeat in parliament meant it hadn’t been “plain sailing.”
“Focus today will remain on parliamentary developments, with the government set to table a one-line bill in order to hold an early poll. For the pound, mounting election uncertainty suggests the balance of risks is now tilted to the downside.”
Neil Wilson, chief analyst at Markets.com, said: “Sterling will naturally remain sensitive to headline risks, but at present [the pound] seems pretty well anchored to $1.285.
“The main risks to the downside from here is no-deal, which has been pretty well averted, though not entirely.
“There still seems to be under-priced tail risk on no-deal, but for now traders will pretty much sit on their hands until we know what the outcome of these votes today.”
Naeem Aslam, an analyst at ThinkMarkets, said: "Bulls have finally escaped the selling pressure and pushed sterling higher on the back of the news that Labour is finally backing the elections. The spike in sterling is decent but we are not expecting any significant moves."
Chris Towner, a director at JCRA, said: “Now sterling will be buffeted by the latest polls. In case Labour is doing well, it is expected to put pressure on sterling and if the Conservatives are doing well in the polls, we expect support for the currency."