Pound Slides as May's Divided Cabinet Tested Over Brexit Plans

(Bloomberg) -- The pound’s strong start to November has taken a turn for the worse as hopes for a Brexit divorce deal fade.

Sterling plunged 1 percent and U.K. government bonds climbed amid reports of pressure on Prime Minister Theresa May to drop her Brexit plan or face defeat in Parliament.

Pound Slides as May's Divided Cabinet Tested Over Brexit Plans

Failure to reach an agreement ahead of a European Union summit in December would leave little time to stop the U.K. crashing out of the bloc in March. That has pushed the two sides to edge closer to a deal, but the compromises have led to domestic opposition that could derail the chances of getting it through Parliament.

“With Brexiteers and Remainers increasingly opposed to the plans being worked upon by May the chances of Parliamentary approval seem to be diminishing by the day, risking a political crisis,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce. “As a consequence, we can expect sterling to continue to take the strain.”

The pound fell 1 percent to $1.2849 by 11:10 a.m. in London, in the biggest drop since mid-September. Sentiment in the options market has also grown more bearish, with risk reversals more in favor of pound puts. Yields on 10-year gilts fell five basis points to 1.44 percent, the lowest since October.

May’s Cabinet remains divided over her strategy, with transport minister Jo Johnson resigning last week and four other ministers reportedly on the verge of quitting. Pro-Brexit Conservative lawmakers and the Northern Irish party that props up May’s minority government have threatened to reject the current deal, while influential opposition figure and Mayor of London Sadiq Khan urged his Labour party to oppose it.

A rejection by lawmakers throws open the risk of May having to go back to the negotiating table with little time left, being forced to hold a second referendum or even to call a general election, any of which could spark a slide in the pound.

“If the market begins pricing no deal, with no sign of progress being made, we’d probably be close to $1.20,” said Derek Halpenny, MUFG’s European head of global markets research.

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