An employee updates the British pound and U.S. dollar currency exchange rate on a board outside outside a foreign currency exchange bureau in this arranged photograph in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Pound Slides as Optimism on May's Revised Brexit Deal Fizzles

(Bloomberg) --

The pound slid in a swift turn of fortunes on speculation that a revised Brexit deal negotiated overnight won’t pass Parliament.

Sterling fell more than 1 percent after U.K. Attorney General Geoffrey Cox said that legal risks remained over the Irish backstop, damping the prospect of Prime Minister Theresa May garnering enough support from lawmakers in a vote Tuesday. U.K. government bonds erased an earlier decline.

Pound Slides as Optimism on May's Revised Brexit Deal Fizzles

“Sterling has been knocked back on the news that Cox is not throwing all of his weight behind last night’s amendment to the Withdrawal Plan,” said Jane Foley, currency strategist at Rabobank International. “Sterling is the best-performing currency in the year to date implying that there is plenty of good news priced in. I think it could be on the back foot today unless May’s deal is passed.”

The pound weakened 0.8 percent to $1.3052 by 12:00 p.m. in London, after a low of $1.3005. It fell 0.9 percent to 86.25 pence per euro. Yields on 10-year gilts were little changed at 1.18 percent, having earlier touched a high of 1.25 percent. Britain’s domestically focused FTSE 250 stocks index pared earlier gains to be 0.4 percent up.

Revised Brexit Terms Meet Market Skepticism Ahead of Cox’s Call

Pound Slides as Optimism on May's Revised Brexit Deal Fizzles

The new agreement seems to fall “short” of the plan Parliament wanted to see, said Steve Baker, a pro-Brexit member of May’s Conservative Party on Monday. A panel of euro-skeptic politicians will examine May’s latest blueprint in detail, he said.

“Given the euphoria overnight, it’s a disappointment for sterling,” said Neil Jones, head of currency sales for financial institutions at Mizuho Bank Ltd. “The market was looking for legal support in order to shift the vote tonight and push the deal through. Cox’s legal opinion on the matter will shift the market away from deal success expectations.”

Traders are also reassessing the chances of Bank of England interest-rate increases. Sterling money markets were pricing a 36 percent chance of a rate hike by December, down from 50 percent earlier on Tuesday.

The lingering uncertainty is enough for Stuart Simmons, senior portfolio manager at QIC Ltd. in Brisbane, to avoid trading sterling. “There’s been too many false dawns,” he said. “While the outcome will likely be positive in the long run, the risk-reward just isn’t attractive.”

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