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- GBP/EUR recovers above 1.1050

- Sterling strength to remain shallow in current atmosphere

- Politics highly fluid, Sterling prone to big oves in either direction

Pound Sterling appears to be holding its nerve in the current highly-charged political atmosphere in the UK, but Prime Minister Boris Johnson's call for a General Election overnight confirm significant headline risks lie ahead.

The GBP/EUR exchange rate had fallen to 1.0903 over the course of the past 24 hours, but has since steadily recovered to trade at 1.1064 in the mid-week session, a daily gain of 0.42%.

Sterling remains a politically-charged currency, and will therefore remain prone to headlines coming out of the House of Commons where an almighty battle to shape the future of the UK is underway and we remain wary that rallies in the currency will be shallow.

Overnight MPs in the House successfully wrested control of parliamentary business away from the government in a vote that saw 21 Conservative MPs rebel and vote with the opposition. It is today confirmed they have been ejected from the Conservative Party, ensuring Johnson is now the leader of a minority government that is effectively powerless to pass laws.

It is little wonder then that the Prime Minister said he intends to puts down a motion that calls for an end to the current parliament by triggering a General Election.

“The consequences of this vote tonight means that parliament is on the brink of wrecking any deal that we might be able to get in Brussels,” Johnson said in a statement to the House following his defeat. “It will hand control of the negotiations to the EU.”

Johnson wants an election before the European Council summit, due on October 17, however it appears opposition parties are not going to accept this proposition; their argument is that a law that effectively 'outlaws' a 'no deal' Brexit must be passed before an election is called.

There is a chance markets are interpreting recent developments as a sign the UK is moving away from a 'no deal' Brexit, believing 'remainers' in parliament will carry the day and force the Prime Minister to ask for a Brexit extension.

Today will see the law designed to outlaw a 'no deal' Brexit presented to the House of Commons, and it should easily pass.

“We will legislate against his disastrous 'no deal' plans. We’ll support a vote to call a General Election, so the people can decide our country’s future, once the bill to stop no-deal is law," said Labour leader Jeremy Corbyn.

However, if the law is passed, it must be noted that Johnson has said under no circumstances would he go to the EU and request another extension, which is exactly what the new law would require of him.

Johnson might refuse to faciliate providing the new law with royal assent, ensuring it never comes into force. The UK parliamentary system works in a manner whereby all laws passed by the House of Commons must be presented to the Queen to be rubber stamped.

It is the Government that conveys the law to the Queen: therefore Johnson can simply sit on his hands, thereby the law fails to come into the statute books.

Furthermore, political blog Guido Fawkes is reporting pro-government forces in the House of Lords are drawing up their own strategy that would seek to run the clock down on the law passing through parliament's upper chamber.

In short, politics could be heading for deadlock and it is little wonder Sterling looks like a currency that doesn't know where to turn.

"The Pound doesn't know what to do," says Viraj Patel, foreign exchange analyst with Arkera. "Parliament moves to take 31 Oct No Deal off the table. Johnson says he'll table FTPA to call a General Election. Corbyn says he'll back an election after No Deal officially taken off the table. Lib Dems say the same."

"As was widely expected, the government have lost the vote on the 'no deal' motion, clearing the way for the House to vote the ‘stop no deal’ plan through and thus pave the way for a vote on holding a fresh election. Boris is the first PM to lose his first Commons vote since Lord Rosebery in 1894. The reaction from sterling has been relatively muted, the pound having steadily rallied since the government lost their majority this afternoon," says Chris Beauchamp, Chief Market Analyst at IG.

Beauchamp says he expects "plenty of volatility and uncertainty" going forward, and that the clock on Brexit continues to run down. "MPs are playing a dangerous game, and so much more than winning a vote, or even an election is at stake."

While the Pound has pushed higher against Sterling today, there are warnings from one analyst that the currency could come under significant pressure if the rolling dice lands in favour of a 'no deal' Brexit.

Kallum Pickering, an economist at Berenberg Bank says there is a decent chance Sterling could equalise in value against the Euro should a 'hard Brexit' transpire:

"In our view, fair value for Serling versus the Euro in an orderly Brexit is 1.20. In the event of a hard Brexit, sterling could fall to parity against the euro in the short run. Many factors determine exchange rates. Based on the current sterling-euro rate of c1.10, we calculate that the market sees a roughly 50% probability of a hard Brexit."

Berenberg put the risk of a hard Brexit at 40%. However, Pickering suggests recent developments and the outlook for UK politics now actually tilt the risk to their call "to the upside".

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