LONDON (REUTERS) - The pound held on to the day's gains on Wednesday (Jan 16), trading just off two-month highs against the euro as British Prime Minister Theresa May saw off a no-confidence vote, a day after lawmakers defeated her Brexit divorce deal.
May survived the motion after securing the backing of her own party's rebels and Northern Irish allies, but must now try to find a consensus with other lawmakers over how to proceed with Brexit.
She proposed immediate talks with other party leaders.
The scale of Tuesday's rout is seen opening the doors to a variety of other Brexit options, including a delay to the March 29 deadline to leave the European Union or even a second referendum, even though May has ruled those out in the past.
"Attention will now swiftly turn to Plan B. Our suspicion is that when we hear the PM's next steps on Monday, it will look remarkably like Plan A, which won't offer markets much guidance," said Dean Turner, UK Economist at UBS Global Wealth Management.
He said that "unknowable political outcomes" made it unwise to take outright bets on sterling at present.
By 7.45pm (3.45am on Thursday, Singapore time), the pound was trading at 88.55 pence per euro, inching up from 88.65 just before the vote and up 0.2 per cent on the day. It held just off the two-month high of 88.40 pence.
Against the dollar, it was a shade firmer at US$1.2880, compared to around US$1.2860 before the vote. It had hit a two-month high on Monday at US$1.2930.
Bank of England Governor Mark Carney said earlier in the day that sterling's rise after May's plan was defeated suggested investors felt the risk of a no-deal Brexit had diminished, or that the process would be extended.
"The expectation that May is now set to seek cross-party backing for a new deal is also reassuring for investors, since this suggests an effort will be made to find a compromise with broader appeal," Rabobank strategists said in a note.
Expectations that Britain may be inching towards a "softer" Brexit is also playing in the currency derivative markets.
Implied volatility on the pound for three months slipped back towards November lows, indicating markets are slightly more optimistic about the pound in the short term.
"We still anticipate a decent-looking Brexit Bill will be passed and any concessions from the prime minister could result in a 'softer' Brexit," said Hamish Muress, currency analyst at OFX.