Pound pummelled as 40 Tory MPs prepare for vote of no confidence in Theresa May

As many as 40 Conservative Members of Parliament were said to be preparing to sign a letter of no confidence in Prime Minister Theresa May ahead of a crucial round of Brexit negotiations, setting the pound sharply lower on what is likely to be a rollercoaster week.

A list containing the names of as many as 35 party members said to be circulating after May's speech at the Conservative party conference in Manchester in October has since risen as a result of the recent resignations of Michael Fallon and Priti Patel, as well as the 10 Downing Street's handling of the Westminster sex scandal.

The list would require just eight more names to trigger a vote of no confidence in the PM which, if lost, would result in a leadership contest within the party.

Over the weekend, a letter addressed to May from staunch Leave advocates Boris Johnson and Michael Gove was released in which the pair warned that transition arrangements for the UK's departure from the EU must be finalised by 30 June 2021, urging the PM's team members fall in line with their plans by "clarifying their minds".

The letter was seen by many as an attack on Chancellor Phillip Hammond, a remain campaigner who had previously made calls for a softer Brexit, for not possessing the "sufficient energy" to prepare for Britain's future outside of the EU.

It reads: "Your approach is governed by sensible pragmatism. That does not in any way dilute our ambition to be a fully independent self-governing country by the time of the next election. If we are to counter those who wish to frustrate that end, there are ways of underlining your resolve.

"We are profoundly worried that in some parts of government the current preparations are not proceeding with anything like sufficient energy.

"We have heard it argued by some that we cannot start preparations on the basis of no deal because that would undermine our obligation of 'sincere cooperation' with the EU. If taken seriously, that would leave us over a barrel in 2021.

"We all want you to push your agenda forward with confidence and have your government articulate the following."

Downing Street had not commented on the letter as of Monday morning.

The pound fell sharply on Monday morning to as low as $1.3043, wiping out modest gains made on Friday.

It was the biggest decline since 2 November when the Bank of England chose to increase interest rates for the first time in ten years.

As an indication of nervousness implied 1-week volatility has spiked to its highest since Nov 2nd, rising to 8.7 from below 6.5, while one-month implied volatility has also jumped

More volatility in the pound is expected for the rest of this week, said analyst Neil Wilson at ETX Capital, with traders cautious on the pound’s outlook but the currency for now just about keeping its head above water.

“Sterling is under heavy selling pressure this morning as political uncertainty rears its head again," he said, adding there was strong technical support at $1.3040, a low seen on 3 November, if not the 6 October low around $1.3027.

"With ears to the ground listening for Brexit developments, at the moment this looks more like the usual background Westminster noise than any meaningful development. The 40 MPs is short of the 48 required to force a vote on her leadership and with Labour looking strong, going to the country again is the last thing most Conservative MPs want.

"Nevertheless, investors are rightly exercising caution on sterling given the risks with regards to the Brexit process. With the EU preparing for talks to collapse, the stakes are getting higher. Britain has less than two weeks to come up with answers for the EU or we face a potential no-deal scenario.

"If the market decides the UK cannot meet the EU’s demands in time it could send the pound sharply lower, perhaps to $1.25 or below before the deadline is reached. As we approach Barnier’s deadline implied volatility levels may rise further and this may see sterling squeezed."

The pound could be buffeted by some important economic data, with inflation due out on Tuesday and employment and wage data on Wednesday, while a number of Bank of England policymakers are also due to speak, including on Tuesday, when Governor Mark Carney is scheduled to participate on a panel with Federal Reserve chair Janet Yellen as well as the ECB's Mario Draghi and their Japanese counterpart Haruhiko Kuroda.

Bookmaker Paddy Power cut its odds on May to stand aside by the end of November to just 5/2, giving Labour leader Jeremy Corbyn the best odds at 5/1 to succeed her.

A spokesman for Paddy Power said, "It looks like we're getting very close to May Day, as Theresa faces the mother of all struggles to retain authority both in Europe and within her Party."

The bookie also said the likelihood of another UK general election being called in 2018 had risen to 9/4 due to the uncertainty.