Photo: AFP/Paul Ellis

The British pound recovered Tuesday from a slide of as much as 1% against the US dollar on Monday, as fears of a plot to remove Prime Minister Theresa May subsided. Weekend reports that 40 members of May’s Tory party were set to sign a letter of no confidence appear to have been exaggerated as both sides have reason to fear her removal, according to the Financial Times.

The real test for the pound is how May will navigate the issue of a settlement with the EU. Brussels imposed an informal deadline for the UK to propose a settlement amount this month, warning that failure to make progress on the issue would seriously delay a final transition deal.

Monday’s slide in the pound was “probably an indication that a UK-EU settlement is in the price but of course a sudden change in trajectory in the UK, politically, could derail that,” UBS UK investment head Geoff Yu was quoted by the FT as saying.

Scotiabank currency strategist Qi Gao said, however, that “if we do manage to navigate such issues, then the stage will be set for a modest recovery over the medium term. We continue to target US$1.36 for sterling in 12 months.”