Sterling tumbles as PM May races to salvage Brexit deal

[LONDON] Sterling tumbled on Thursday after a series of resignations rocked Prime Minister Theresa May's government and threw into doubt her long-awaited Brexit agreement just hours after it was unveiled.

The pound fell 1.5 per cent versus the dollar and was headed for its biggest drop this year against the euro after Brexit minister Dominic Raab and three other ministers resigned in protest against her plan.

Traders fear Mrs May's leadership is now in serious jeopardy.

"What concerns us is how many ministers seeing this news will be pondering if it is better to get their resignations in now rather than wait," said Nomura strategist Jordan Rochester.

"If several ministers go this becomes more difficult for Theresa May to hold her position," he added.

Mrs May said on Wednesday she had won over her divided Cabinet after a five-hour meeting but the resignations fuelled a selloff, reflecting rising fear in the markets about a "no-deal" Brexit.

In volatile trading, the pound sank as low as 1.8 per cent to US$1.2751, its second biggest drop this year. It dropped 1.5 per cent to 88.57 pence versus the euro.

Markets had priced in some opposition to the draft deal negotiated by Mrs May but the latest round of resignations unleashed a fresh wave of volatility in UK assets.

That sent investors to the relative safety of government debt.

British financial regulators called major banks asking for feedback on market conditions because of sharp falls in the pound, sources said.

The prime minister showed little sign of backing down but senior Eurosceptic lawmaker Jacob Rees-Mogg said a number of letters of no confidence in Mrs May had been submitted to party officials.

Concerns about a leadership challenge were reflected in the foreign exchange derivatives markets, where three and six-month gauges of expected volatility in the British currency spiked to their highest levels in two years. Extreme short-dated volatility indicators also jumped.

The brewing uncertainty about Britain's economic future was also shown in the money markets, where investors have all but priced out a rate hike by the Bank of England next year.

Britain is now more likely to either stay in the European Union or leave it in a "no deal" Brexit than depart under the terms presented by Prime Minister May, analysts from US bank Citi said.

"Over the next few days the very real prospect of a hard Brexit will likely ensure that the pound remains vulnerable," said Jane Foley, an FX strategist at Rabobank.

"Any turn of events in Westminster that appears to increase the risk of a general election would likely compound the vulnerability of the pound," she added.

REUTERS