UK pound tops $1.27 as Prime minister details her departure from Downing Street

Sterling languished just off four-month lows on Tuesday, with risks of a no-deal Brexit seen as growing as the wrestling to replace Prime Minister Theresa May got underway.

The prospect of a no-deal Brexit, which most economists say would adversely damage the British economy, has re-appeared as a key risk for sterling after May said last week she would step down as leader of the Conservative Party on June 7.

With the Brexit Party giving the Conservatives a wallop in last week’s European elections, many Conservative candidates contending for May’s job are under pressure to deliver a more definitive split with the EU when Britain is scheduled to leave the bloc on Oct. 31.

While foreign minister Jeremy Hunt said no-deal Brexit would amount to “political suicide”, alternative candidates including front-runner Boris Johnson have warned they are prepared for that if Brussels does not reopen negotiations over May’s thrice rejected withdrawal agreement.

Sterling slipped 0.13% to $1.2657, having traded as low as $1.2605 last week. It was down 0.2% versus the euro at 88.405 pence to stand just off four-month lows.

With no-deal Brexit probabilities remaining at around 15-20%, there is an expectation that parliament would submit a no-confidence motion against any prime minister who takes the country in that direction.

The pound has declined for three successive weeks versus the dollar and euro. It has fallen 3% in May as May failed in her battle to find a Brexit compromise with the opposition Labour Party.

Options markets are displaying increasing uneasiness about the Oct. 31 deadline, with implied volatility contracts expiring after that date trading at a considerable premium to those expiring earlier.

The premium for sterling puts — the right to sell at a certain price — has also improved compared to calls which confer the right to buy.