Sterling Heads for 2nd Biggest Drop in 2018 as Brexit Faces Hurdles

LONDON (Reuters) -
(Reuters/Russell Boyce)

British currency plunged on Thursday and is set for its second-biggest drop this year as opposition mounted to Prime Minister Theresa May’s draft deal for leaving the European Union with a series of resignations.

Brexit Minister Dominic Raab and three other ministers resigned in protest against her plan, fueling a sell-off in the pound which was already struggling to gain traction after May said on Wednesday she had won over her divided Cabinet after a five-hour meeting.

In chaotic trading, the pound plunged 1.7 percent to $1.2751, its second-biggest drop after a 1.73-percent fall in September.

It trimmed some of its losses to stand 1.5 percent down on the day at $1.2803 after May said she will negotiate intensively with the European Council to turn the draft deal into a full future framework.

“What concerns us is how many ministers seeing this news will be pondering if it is better to get their resignations in now rather than wait,” Jordan Rochester and Andy Chaytor at Nomura said in a client note.

“If several ministers go this becomes more difficult for Theresa May to hold her position.”

Against the euro, the pound fell by 1.4 percent to 88.30 pence.

While markets had priced in some opposition to the draft deal negotiated by May, the latest round of resignations has unleashed a fresh wave of volatility in U.K. assets, sending investors to the relative safety of government debt and buying currency options.

Her position as leader of the Conservative Party and thus her premiership are under threat, which could lead to a leadership challenge.

Those concerns were reflected in the foreign exchange derivatives markets where three- and six-month gauges of expected volatility in the British currency remained firm while extreme short-dated volatility indicators also jumped.

That uncertainty was also reflected in the money markets where investors have all but priced out a rate hike by the Bank of England next year.

Bond yields fell across the board with those on benchmark ten-year British government debt falling more than 13 basis points to 1.375 percent, putting it on track for the biggest one-day fall since August 2016.

Big moves this week have boosted volatility in the British currency with realized price swings this week alone averaging about 12 percent annualized on a daily basis, twice that of end-October.

“All eyes are now on Theresa May with a challenge to her leadership increasingly being viewed as the next catalyst for another sterling collapse,” said Jeremy Thomson-Cook, chief economist at WorldFirst.