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LONDON (Reuters) - After eight months of discounting a plethora of UK political risks, sterling's relaxed reaction to the prospect of the launch of Brexit talks and a new Scottish independence referendum may be understandable, but the worst may not be over yet.
Declared the official opposition to the government's drive for a "hard Brexit" when it sank last year, the pound barely moved on Monday as the Scotland's first minister demanded a new vote and the government saw off the last pieces of parliamentary opposition.
That stability may have been some measure of how far sterling has fallen - more than 20 percent in a year - and how cheap it now seems to big financial investors.
But for the past three weeks it has looked more like the calm before a gathering market storm that may be launched by a combination of a weakening economy and an EU summit in early April that will establish ground rules for the talks.
Several of the currency world's top 10 banks, who were more cautious on the pound at the end of last year, have been aggressive again in the past fortnight in advocating more declines. Sterling has been the worst performer against the dollar among the major developed-world currencies as a result.
Net "short" bets against the pound on the regulated U.S. futures market took their biggest jump in six months last week, a fifth rise in a row taking them to the highest since November.
They remain short of the record highs reached after a "flash crash" last October, suggesting there may be more room to fall. An alternative measure of investor movements run by Citi, the world's biggest currency trader, says nothing in the past month's flows suggests there is a barrier to more selling.
"The focus on sterling has definitely reduced significantly this year and that does suggest the moves down may be slower and more of a grind," said Josh O'Byrne, a strategist on the G10 group of major currencies with the U.S. bank.
"But a move below $1.20 by the end of the year wouldn't surprise us at all, and you probably have a bit more room, towards $1.15. Positioning isn't too heavy and the politics may represent a bit of a catalyst for the wider economic picture."
The pound sank after the Brexit vote last June largely on the assumption that consumers and investors would spend less in the uncertain environment that followed and that economic growth in general would suffer.
In the event, the British economy has stood up well. Yet in contrast to the euro, it now heads into a time of unprecedented constitutional uncertainty with a record current account shortfall as well as more than $2 trillion of public debt that needs servicing annually and which is still climbing.
A number of leading data indicators have turned lower and economists point to the arrival of hefty price increases caused by sterling's depreciation so far as possible turning points for household spending.
That may come as EU officials deliver the first blows in the talks after an EU summit next month.
"In the medium term, there is clearly pretty large headline risk to the pound and we are starting from a fairly weak position on the deficits, both fiscal and external," said James Binny, State Street Global Advisors' EMEA head of currencies.
"We do not have that underlying support that the euro has had."
Like others, Binny also said sterling's longer-term fair value is probably around $1.50 and wonders when its weakness will tempt foreign multinationals and investment managers to invest heavily in UK assets.
But for now the doubt over what deal ministers will emerge with in 18 months time should override such thoughts, he said.
"If you are going to make a big strategic purchase in the UK, it would seem extremely risky to do so before you know what deal they are getting," he said. "If you are thinking of buying the pound, you would tend to think that you will still get a better opportunity."
All that said, some teams of bank strategists have also begun to ask what political risks are not yet provided for.
Scottish First Minister Nicola Sturgeon has been indicating for weeks that she was liable to demand a referendum and the pound barely budged when she did on Monday, gaining almost half a percent on the day.
Likewise, Prime Minister Theresa May signaled months ago she would launch Article 50 talks on leaving the bloc by the end of March and has made clear the government is on course for a "hard Brexit" that imposes immigration and other controls at the expense of membership of the EU's lucrative single market.
"To me the market has put a lot of Brexit into the price," says Peter Gorra, Head of G10 Trading at Nomura in New York.
"The market always looks far ahead and the pound is down so much in the last year. I don’t know if I would call the bottom, but we are certainly getting near."
Writing by Patrick Graham