Brexit: Pound slides on doubts over No10's prospect of success

Currency markets were pessimistic on Monday that Theresa May can pull a Brexit rabbit from the hat as she tries to bring sceptical backbenchers and Northern Ireland’s DUP round to supporting her exit deal.

The pound was down 0.5% against the euro and 0.2% versus the dollar at 1.1681 and 1.3262 not long after midday on Monday.

Having suggested that MPs will be asked to hold a third ‘meaningful vote’ on the prime minister’s deal before Wednesday’s European Council meeting, Downing Street was reported to be mulling postponing the vote - known at MV3 - or possibly cancelling it if sufficient support fails to materialise. The first two votes, in January and last week, both ended in a thudding defeat for the government.

At a press briefing on Monday, Number 10 refused to commit to holding another vote on May’s withdrawal arrangements this week, unless it is believed there is a “prospect of success”.

Earlier, Foreign Secretary Jeremy Hunt cited “some cautious signs of encouragement” that some of those who voted against May’s deal previous in the second vote have agreed to flip.

Talks with the DUP over the weekend are thought to be a decisive factor in bringing many of the hard-Brexit-backing European Research Group round to May’s deal.

ERG chairman Jacob Rees-Mogg said on LBC radio: “I’m waiting to see what the DUP will do. The deal is still a very bad deal.”

Even if the DUP backs the government’s plan in MV3, this will still not guaranteed to bring around all Conservative rebels.

Economist Samuel Tombs at Pantheon Macroeconomics said it was "highly likely" that May will fail if she tries again.

"To win, she needs the backing of both the DUP and virtually all members of the ERG. Of the 75 Tory MPs who voted against the Withdrawal Agreement earlier this week, 69—the ERG—wanted a harder or cleaner Brexit, while six wanted a softer Brexit or a second referendum. The latter group have no incentive whatsoever to change their position now."

MARKET UNCERTAINTY

Market analyst David Cheetham at XTB largely agreed and said the pound's slide was a reflection on the market's uncertainty.

"If the DUP fail to get on board, then asking MPs to vote again appears to be a fruitless endeavour while there’s also some chatter that PM May could offer to step down to secure additional support," Cheetham said. "The uncertainty is weighing on the pound which is the worst performing major currency on the day. Longer-term both the fundamental and technical outlook for the pound appear fairly constructive, but for the here and now the market is extremely sensitive to headline risk related to Brexit."

Should the third meaningful vote go ahead, bookmakers at Ladbrokes were also not displaying optimism, offering a 7/4 price that the PM gets her deal over the line with MPs, and odds-on at 2/5 that she fails again.

Jessica Bridge of Ladbrokes said: "Although there's a number of MPs changing their mind on the deal at the eleventh hour, it looks like May will still fall short and fail for a third time."

Looking further forward, many investors and economists are cautiously optimistic. Berenberg said its clients seemed to be largely receptive to the bank's view that the "key tail risks" of a no-deal hard Brexit and a government led by Jeremy Corbyn "have receded somewhat in the last three months".

"The UK parliament may not yet know what it wants, but it clearly wants to avoid the hard Brexit," said chief economist Holger Schmieding. "And unless the potential chaos following a no-deal hard Brexit sweeps Corbyn to power, his chances of winning a UK election once the key Brexit risk is out of the way look slim. More than before, clients noted that the UK economy is in good shape fundamentally, especially on the domestic and household side. Relative to current valuations that still capture some risk of a hard Brexit, the UK can look attractive."