LONDON: The British pound rose on Wednesday (Jan 16) as analysts considered the possibility that a stinging defeat for Prime Minister Theresa May's Brexit deal in parliament may somehow lead to Britain remaining in the EU.
Perhaps somewhat paradoxically, May's defeat prompted talk that "we might not see a Brexit at all down the line", said market analyst Joshua Mahony at trading platform IG.
"The fact that we saw this heavy defeat means that Theresa May now needs to come back with some sort of new plan, and one of those plans might be a new referendum," he told AFP.
Analysts said the British people might not vote in favour of Brexit again if they were given another chance.
May later Wednesday faces a no-confidence vote in parliament which she is widely expected to win.
Bank of England governor Mark Carney meanwhile said the pound's rise "would appear to reflect some expectation that ... the prospect of no-deal may have been diminished".
The rising pound weighed on London's benchmark FTSE 100 index which features many multinationals earning much of their income in dollars and euros.
London's second tier FTSE 250 was up slightly. Featuring mostly companies operating in the UK, the 250 index is along with the pound seen as a clearer indicator of Britain's future economic health.
'MANY MAY BE SURPRISED'
"Many people may be surprised that the pound is holding firm and the UK-heavy FTSE 250 index is rising off the back of Theresa May's Brexit vote defeat," noted Russ Mould, investment director at stockbroker AJ Bell.
"In essence the market believes we are going to get more time for negotiations, we're less likely to have a hard, economically-damaging Brexit, or Brexit won't happen at all.
"It seems inevitable that both the pound and the stock market will be volatile for weeks or months to come until we have a definitive answer as to the exact direction of travel for Brexit," Mould added.
Sterling had tanked to a near two-year low soon after the government's proposal on leaving the European Union was soundly beaten late in London on Tuesday, but it soon bounced back as traders bet there would not be a no-deal exit.
With May on Wednesday expected to win a vote of no confidence called by the opposition Labour Party, talk will move to what happens next.
"If we see May win out, which I think we probably will, then the pound is probably likely to stay as it is, with a lack of direction," said IG's Mahony.
"If she was to lose it, there would be a lot of volatility and uncertainty coming into play and that would be very negative for the pound."
Analysts said May could ask to delay Britain's Mar 29 exit from the bloc as she looks for a more palatable agreement from her EU peers, while there is growing speculation of a general election and even another referendum.
"Momentum is shifting away from the harder Brexit route and towards a number of options ranging from postponement and second referendum. That is pound supportive," said Gavin Friend at National Australia Bank.
But he added: "I don't see the pound rallying much until markets are sure the (ruling) Conservatives have seen off the confidence motion."
In Brussels EU chief negotiator Michel Barnier warned "the risk of a no deal has never seemed so high".
Earlier Wednesday, Asian equity markets diverged after Tuesday's rally that was fuelled by China's plans to cut taxes in a bid to support the country's stuttering economy.
Eurozone stock markets closed higher, and Wall Street was also posting gains in the late New York morning.
"US indices have extend their gains from late December, and but traders are treading lightly as we have yet to hear further details about how the US-China trade talks ended last week," said David Madden at CMC Markets.
Traders are also growing increasingly worried about the lack of movement in the US over the government shutdown, which is now in its fourth week, with both sides digging their heels in.
Key figures around 1640 GMT:
Pound/dollar: UP at US$1.2868 from US$1.2861 at 2140 GMT
Euro/pound: DOWN at 88.62 pence from 88.75 pence
Euro/dollar: DOWN at US$1.1404 from US$1.1413
Dollar/yen: UP at 108.84 yen from 108.72
New York - DOW: UP 0.7 per cent at 24,233.83 points
London - FTSE 100: DOWN 0.5 per cent at 6,858.16 (close)
Frankfurt - DAX 30: UP 0.4 per cent at 10,931.24 (close)
Paris - CAC 40: UP 0.5 per cent at 4,810.74 (close)
EURO STOXX 50: UP 0.2 per cent at 3,077.22
Tokyo - Nikkei 225: DOWN 0.6 per cent at 20,442.75 (close)
Hong Kong - Hang Seng: UP 0.3 per cent at 26,902.10 (close)
Shanghai - Composite: FLAT at 2,570.42 (close)
Oil - Brent Crude: DOWN 32 cents at US$60.32 per barrel
Oil - West Texas Intermediate: DOWN 53 cents at US$51.58 per barrel