British politics have thrown up more than their fare share of surprises in the past few years but the past 48 hours have been particularly eventful for the UK…and Sterling. Two days ago, the government announced that UK and EU negotiators had finally broken the deadlock in protracted negotiations for the terms and conditions of the UK’s departure from the EU (the Withdrawal Agreement) and for an outline of the UK’s future relationship with the EU. Sterling rallied on the news and the scene was set for a special cabinet meeting yesterday.
Prime Minister somehow managed to convince ministers on both sides of the Brexit divide to agree to this draft Brexit deal but there were already signs that not all was well. Nine ministers had reportedly voiced their objections to a deal which they viewed as offering little upside but significant downside. It was telling that Sterling barely moved when around 19.00 London time Prime Minister May announced she was ready to tell Brussels that her government had agreed to the draft deal and that a Special EU Summit pencilled for 25th November could go ahead. The GBP/USD cross barely managed to rise above 1.30 despite a slight wobble in the Dollar yesterday following slightly lower-than-expected US CPI-inflation numbers and a somewhat less hawkish than usual Fed Chairperson Powell.
The cracks in the Conservative government became apparent this morning, with Brexit Secretary Dominic Raab –theoretically the UK’s chief negotiator – resigning on the grounds that the draft Brexit deal had “fatal flaws”. His departure was swiftly followed by the resignation of the Pensions Secretary Esther McVey, Northern Ireland minister Shailesh Vara and a gaggle of other junior ministers and private secretaries. Sterling promptly caved in, with GBP/USD tumbling below 1.28 at one point, and the Sterling trade-weighted index is now down nearly 2% since Tuesday.
These mass resignations have prompted much speculation that Theresa May could be forced out in a leadership contest but ultimately markets are fretting that this saga could end up with the UK exiting the EU without a deal, the Hard Brexit which few in the UK seemingly want. Underpinning these concerns is the risk that a majority of MPs in the House of Commons – the lower house of parliament – could vote against the draft deal which the cabinet reluctantly agreed to only 24 hours ago.
Parliamentary arithmetics are complex but MPs on both sides of the Brexit divide are it would seem increasingly in agreement that they cannot support a draft Brexit deal which they see as offering the worst of both worlds. This crucial parliamentary vote has reportedly been penciled in for the 18th December and the question remains whether Prime Minister May can survive that long, let alone convince about 320+ MPs to vote for this draft Brexit deal.
