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Pound Sterling Plummets as Raab, McVey Resign but May Stands Firm

May fights on and defends her deal

Above: Theresa May fights on and defends her Brexit deal in parliament saying it is the only sensible solution that delivers the Brexit voted for in 2016. Image (C) Pound Sterling Live.

- May defends Brexit deal in Parliament

- Brexit secretary Raab quits, followed by McVey

- No confidence vote in PM May looms

- Brexit plan doesn't have numbers to get through parliament

Prime Minister Theresa May has launched a staunch defence of her Brexit plan before parliament saying if it is not accepted the U.K. risks a 'no deal' exit from the European Union in March 2019.

May come under fire from opponents in all corners of the House but appears willing to stand her ground saying the deal she has arranged is one that has the best interests of the U.K. economy at heart and will therefore be the deal that is put to parliament once it has been signed off by European leaders on November 25.

A cabal of about 80-90 Conservative party parliamentarians are fiercely opposed to the deal citing the deal's backstop clause which they believe exposes the U.K. to becoming an effective colony of the E.U. should it be enforced.

May says the controversial backstop plan will "not necessarily" and "it is my intention to work to ensure such an arrangement is not necessary." May added the European Union were keen to avoid the backstop ever coming into use.

The DUP's Nigel Dodds - the leader of May's Northern Ireland partners - has meanwhile said he is not convinced by this assurance and has made a clear indication in parliament that his party won't vote for the deal.

The DUP's vote is crucial to ensuring the Brexit deal passes and it sounds as though the Prime Minister will not secure their backing and gives us reason to raise expectations for a 'no deal' Brexit.

May's address comes at a torrid time for Sterling.

The British Pound has fallen sharply on the news the U.K.'s Brexit Secretary Dominic Raab has quit government in protest over the Brexit deal struck by the E.U. and U.K. Raab has since been followed by Works and Pensions Secretary Esther McVey and there are expectations further resignations are likely.

The Pound-to-Euro exchange rate is quoted at 1.1334, the Pound-to-Dollar exchange rate at 1.2786. We are seeing huge +1% losses against the Australian and New Zealand Dollars.

pound to Euro graph

Concerning the outlook for Sterling, further losses are likely from here.

"We are entering highly uncertain times for domestic British politics and Brexit: the Pound hates uncertainty of this kind and the outlook for the currency is challenging," says Harry Wills a dealer with Horizon Currency Ltd. Wills is fielding questions on what the latest developments mean for those with international payments and can be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

These developments now cast a significant doubt over whether the agreement reached will ever make it to a political declaration, significantly increasing the risk that the U.K. leaves the E.U. without a deal.

"Sterling has fallen almost two percentage points against the Euro and the US Dollar as markets once again face the heightened uncertainty of not just Brexit, but also the domestic political situation," says Andy Scott, Associate Director at JCRA, an independent financial risk management consultancy.

The resignations - particularly that of Raab - throws May's government in turmoil and will only embolden May's Conservative party critics.

In his resignation letter Raab says, "I cannot suport an indefinite backstop agreement, where the EU holds a veto over our ability to exit, The terms of the backstop amount to a hybrid of the EU Customs Union and Single Market obligations. No democratic nation has ever signed up to be bound by such an extensive regime."

Importantly: "That arrangement is now also taken as the starting point for negotiating the Future Economic Partnership. If we accept that, it will severely prejudice the second phase of negotiations against the U.K."

In her resignation letter to the Prime Minister McVey says the deal agreed with Brussels "will trap us in a customs union, despite you specifically promising the British people we would not be. It will bind the hands of not only this, but future Governments in pursuing genuine free trade policies."

Shailesh Vara, a Northern Ireland Minister was the first to resign from Government this morning over the deal and there is speculation more will follow him and Raab.

A steady flow of interviews with Parliamentarians meanwhile tell us that a solid group of 80+ Conservative MPs won't back May's plan. Add to this Labour's confirmation it won't support the plan, expectations that the DUP will withdraw support and the SNP's long standing resistance to the plan and it becomes clear the plan is dead on arrival.

"The Conservative-DUP alliance only has a 13-seat working majority in the House of Commons. Any small group of MPs within the government could theoretically scupper the deal. For the time being, the heightened uncertainty is likely to temper any market optimism that the U.K. will avoid the no-deal hard Brexit risk (20% chance)," says Kallum Pickering, an economist with Berenberg Bank.

May will now try to sell her plan when she appears before parliament today, we expect a steady flow of news out of Westminster to keep Sterling on its toes.

However, it could be the 'writing is on the wall' for May.

"It is almost impossible to see how she can survive as Tory leader and PM after such a shattering blow to her reputation for competence," says Robert Peston, ITV's Political Editor. "She said a few days ago we are at the Brexit end game. I suspect instead we are at the May-as-PM end game."

 

No Confidence Vote Looms

Sterling did initially jump on the news a deal had been reached before retracing the gains to sit around the same levels we have seen for a number of days now.

Clearly markets remain nervous and unconvinced that the deal will make it over the finish line as 1) Theresa May might face a confidence vote and 2) the Brexit deal might not get through the U.K. parliament owing to fierce opposition from Conservative party MP's who believe this deal is a betrayal of the Brexit vote.

A vote of no confidence in the Prime Minister is the more imminent of the two sources of uncertainty weighing on the Pound and will be where our focus rests over coming hours and days.

BBC political editor Laura Kuenssberg reports the Conservative party will ‘likely’ call for a vote of no confidence in her as their leader as soon as today.

Kuenssberg reports Brexiteers were so angry about May’s draft deal to leave the European Union that they were submitting letters to the head of a committee of Conservative lawmakers responsible for handling any leadership challenge.

To trigger a vote of confidence, at least 15% of Conservative party MPs (48 at present) must write to the 1922 Committee chair Graham Brady, requesting one. We know that Brady only needs only a handful more letters at most to trigger the vote.

With key Brexiteers like Jacob Rees-Mogg holding back on submitting their letters to give the PM more time to negotiate, we would imagine the deal presented will be enough to trigger the numbers required to reach the threshold.

Should the number reach 48, the 1922 chairman will consult with Prime Minister May and determine the date of a confidence vote which should be held "as soon as possible in the circumstances prevailing".

May would need half – so 159 votes – to survive the vote. If she wins she is immune from another such vote for a year.

If she loses, she is obliged to resign and barred from standing in the leadership election that follows.

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Why a Vote Could be Good for the Pound

We are of the belief that a vote of no confidence would be good for May, and by extension the British Pound which craves stability first and foremost.

Should a no confidence vote be called it merely tells us that 15% of the party - the hard Brexiteer contingent - are wanting to depose their leader in order to try and swing the trajectory of Brexit their way.

What evidence is there that this group can muster 159 votes to actually win a the no confidence vote? Very little. Surely if there were the numbers the 15% level would have been triggered in the wake of the May's Chequers Brexit plan being revealed.

It appears that the majority of moderate Conservative party members would back her and her vision and demand the kind of stability the country so desperately requires of its leaders.

"Consider a scenario where Theresa May wins the confidence vote (can’t have another one for 12 months) or new Tory PM pushes for a softer Brexit (one that Labour can’t credibly vote down). Not all paths from UK political chaos are GBP negative," says foreign exchange strategist Viraj Patel.  

With a vote of no confidence out of the way a huge chunk of political uncertainty is removed from the equation for the Pound and we believe it would cement a floor under the currency.

However there remains a strong chance hardline Conservative party MPs block the passage of Brexit legislation in an attempt to force a 'no deal' Brexit.

They, and Northern Ireland's DUP have the numbers to do this; but are they willing to go it alone and single-handedly bring down the Brexit deal, and the government? Rebels will  surely calculate that such an outcome could well bring down the government and their party's chances of remaining in power.

And if the Conservatives go, Brexit will also likely go too.

This deal represents the best shot they have of securing any kind of Brexit at all and is the one reason why they might just ultimately side with the government and vote through the Brexit deal put before them.

 

A May Miracle

John Hardy, an analyst with Saxobank sees a scenario where a "May miracle" transpires which saves her skin, Brexit and the value of the Pound in the process:

"Theresa May survives the confidence vote and engineers a miracle, perhaps ramming through a key few changes to the deal at the Brexit summit on the 25th to keep the language sufficiently vague on future negotiations to keep most of her party on board, meaning only a few Labour Leave votes are needed to deliver the Brexit under this deal. The threat of chaos could move the EU on key points if it is clear that the deal won’t pass as currently written."

Indeed, we know from May's appearance in the House of Commons today that there are still  some parts of the agreement that are open to negotiation.

It could be that May will make a calculation as to what minimal change will be required to bring her party and the DUP back onside.

European leaders watching the ongoing reaction in the U.K. will surely know they will need to step up to save May and their deal and could therefore be open to any further proposals.

 

Big Gains in the Pound if Brexit Deal is Passed

Foreign exchange strategist Jordan Rochester with investment bank Nomura said the Pound would surge 1-2% higher on the agreement of a Brexit deal.

This has however not transpired and the analyst is now saying the divorce agreement’s success ultimately hinges upon whether it passes through parliament.

“Not until the day it does will the pound be able to have it’s meaningful ‘I’ve got a golden ticket’ rally that we’d expect on securing the transition period ahead,” says Rochester.

If the Brexit deal is able to get through Parliament, Rochester expects GBP/USD will "be in a $1.35 to $1.40 range when it is passed by year-end."

And, this should prompt the Bank of England into raising interest rates in 2019.

"Hikes will be in the pipeline, it's just a matter of timing." This would allow Sterling  to push higher to $1.50 by end-2019.

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