British Pound Dented by Botched Bid for EU Concessions, DUP Threat Lingers

© European Union, 2018 / Source: EC - Audiovisual Service / Photo: Etienne Ansotte.

- GBP slides as USD rises and Sterling wilts on fresh Brexit fears.

- PM May fails in bid for legal commitment on Northern Irish "backstop".

- Leading the DUP to continue its rebellion against the UK government. 

The Pound was sent tumbling Friday not only by the strengthening greenback and Sterling's close correlation with the Euro-to-Dollar rate but also renewed fears over the stability of the UK government. 

Northern Ireland's Democratic Unionist Party, the UK government's confidence and supply partner, set out another challenge to the Prime Minister after a botched attempt by her to secure Brexit-related concessions from the EU.

.@DUPleader "The Prime Minister has promised to get legally binding changes. The reaction by the EU is unsurprising. They are doing what they always do. The key question is whether the PM will stand up to them or whether she will roll over as has happened previously. pic.twitter.com/ALbvmcGDyN

— DUP (@duponline) December 14, 2018

PM May is alleged to have told her own MPs when attempting to survive Wednesday's leadership challenge that a legally binding commitment relating to the so-called Northern Irish backstop was in the pipeline. 

But when addressing reporters from Brussels Friday, following a European Council summit, she spoke only of 'assurances' that have 'legal status' rather than 'commitments' that are 'legally binding'.

"The Prime Minister has changed her language back to reassurances, from legal changes," says John Redwood, a Conservative Party MP and supporter of Brexit, in a Friday blog post. "It is difficult to see the DUP coming back on board given the lack of any legal text to remove the backstop."

Above: Pound-to-Dollar rate shown at hourly intervals.

The Pound-to-Dollar rate was -0.80% lower at 1.2551 during noon trading Friday and has now fallen by -7% for the 2018 year.

Above: Pound-to-Dollar rate shown at daily intervals. 

DUP MPs want the Northern Irish backstop, which could all but annexe the province from the UK in the event it is triggered, removed from PM May's Withdrawal Agreement. 

They have threatened to vote against the agreement in parliament and hinted they could vote with the opposition Labour Party if it calls a ballot of confidence in the government.

A loss of such a confidence vote would bring down the government and lead to another general election, with unknown implications for the path toward Brexit as well as the economy.  

Another general election would almost certainly be negative for the Pound as it would give rise to market fears of a possible opposition Labour Party government, which has an openly Marxist front bench.

"Amidst the heightened Brexit uncertainty, one thing seems clear, and that is that the negotiations will go down to the wire. This lack of clarity is likely to see growth slow sharply in Q4 2018 (see here) and keep the Monetary Policy Committee (MPC) on hold despite signs that inflationary pressures are building," says Ruth Gregory, an economist at Capital Economics.

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