Sterling was trading below $1.24 on Wednesday morning amid dollar strength and growing investor concern that a no-deal Brexit is becoming increasingly likely.
The pound was 0.2 per cent lower against the dollar at $1.2385, stuttering around 25-month lows, while it fell by the same amount against the euro.
The currency is down nearly 1.5 per cent this week as investors have responded to the growing risk that Boris Johnson’s Brexit strategy could lead Britain to a no-deal exit from the EU within months.
Many currency investors have preferred to stay on the sidelines given the fog of political uncertainty, but this week’s significant move lower was sparked after Mr Johnson signalled the Irish backstop would have to be scrapped entirely in any fresh Brexit deal, something the EU has rejected. One EU diplomat said the frontrunner to replace Theresa May in Downing Street seemed to be living in “a fantasy” world.
Esther Reichelt, a foreign exchange strategist at Commerzbank, said some investors had come to the realisation that the next UK prime minister will struggle to find an easy solution to the Brexit deadlock “only yesterday.”
“Yesterday’s movements showed once again that the FX market is still finding it difficult to reflect Brexit news adequately,” she said.
Moves in the options market showed investors are starting to seek more protection against a sharp move in sterling around the October 31 Brexit deadline, however.
Implied volatility, a measure of expected fluctuations in the currency over the next three months based on trading in options, has risen in recent days, although it remains low compared with the period late last year when Mrs May was unsuccessfully trying to force her own Brexit deal through parliament.
Ms Reichelt said the relatively cheap price to hedge offers an “attractive opportunity” given that sterling could break significantly one way or other dependent on politics.
“The rising perceived probability of a disorderly Brexit after the 31 October deadline is reflected in the options market, with the sterling implied volatility curve heavily kinked around the deadline date,” currency analysts at ING said.
Many investors and analysts are coming to the conclusion that a general election and subsequent Brexit delay is a significant possibility.
Seema Shah, chief strategist at asset manager Principal Global Investors, said: “There are, of course, many steps and permutations possible before the end of October — a general election being the key obstacle, while the last three years have shown us that kicking the can down the road always seems the easiest path to take.”