The pound fell rapidly away from long-term highs on Tuesday morning after Britain’s Attorney General said that the “legally binding” assurances secured on Monday night by Theresa May merely “reduced the risk” of the UK being trapped in a permanent backstop.
In the early hours of Tuesday morning, ahead of the day’s meaningful vote on the proposed UK-EU Brexit deal, there had been “nervous hopes,” the BBC’s Laura Kuenssberg said, of the deal being passed, and as such the British pound held near long-term highs against the euro and Australian dollar, among other currencies.
Things changed, however, shortly after 11am in London, when Britain’s Attorney General Geoffrey Cox said that the three new “legally binding” documents described by British Prime Minister Theresa May and European Commission head Jean-Claude Juncker at a press conference on Monday night, merely “reduced the risk” of Britain becoming trapped in a permanent backstop.
“If through no such demonstrable failure of either party, but simply because of intractable differences … the United Kingdom would have … no internationally lawful means of exiting the Protocol’s arrangements,” Cox said.
In response, sterling fell rapidly. What had been a 21-month high against the euro of €1.18, quickly became only €1.156. Against the US dollar, sterling tumbled from an 8-day high of $1.329 to just $1.302. Against the Australian dollar, by midday in London, we were left with only A$1.845, having been at a 32-month high of A$1.878 hours earlier.
Cox’s legal opinions represent a massive blow to Theresa May’s chances of getting her deal through. According to British bookmakers, her chance is now little more than 10 percent, having been close to 30 percent earlier in the day.
Even prior to Cox’s advice, the opposition Labour party had confirmed it would vote against May’s deal on grounds that nothing had changed.
“The prime minister’s negotiations have failed,” Labour leader Jeremy Corbyn said.
“This agreement with the European Commission does not contain anything approaching the changes Theresa May promised parliament … [and] that’s why MPs must reject this deal.”
Jean-Claude Juncker has said there can be “no third chances” for Britain, and with Brexit only 17 days away, May has warned of a “moment of crisis” should MPs reject the deal on Tuesday.
The Bank of England warned in November that the pound could lose between 15 and 25 percent of its value in the event of “no deal,” and HSBC said something similar in February when it predicted a no-deal GBP/USD exchange rate of $1.1—that’s 16 percent below Tuesday’s midday rate.
Should May’s deal be rejected, MPs will vote on whether to leave the EU without a deal or seek to delay the Brexit date.
Since all is still to play for, expect plenty of currency volatility.