Sterling plunged by over 1 percent against the dollar Thursday morning after U.K. Brexit Secretary Dominic Raab resigned from his post, piling yet more pressure on U.K. Prime Minister Theresa May.
Raab, in a letter to the U.K leader, said he could not reconcile with the terms of her proposed Brexit deal, after the promises the ruling Conservative Party made to the country in an election manifesto last year.
“I regret to say that, following the Cabinet meeting yesterday on the Brexit deal, I must resign. I understand why you have chosen to pursue the deal with the EU on the terms proposed, and I respect the different views held in good faith by all of our colleagues,” Raab said in his letter to May.
“For my part, I cannot support the deal for two reasons.”Raab said. “First, I believe that the regulatory regime proposed for Northern Ireland presents a very real threat to the integrity of the United Kingdom.”
“Secondly,” he added, “I cannot support an indefinite backstop arrangement, where the EU holds a veto over our ability to exit.”
Sterling plunged to $1.2833 from around $1.2994 at around 9:00 a.m. London time, following news of Raab’s resignation. The currency had a volatile overnight session driven by uncertainties surrounding the fate of May’s draft Brexit deal in the U.K. Parliament. At 10:20 a.m. London time, sterling was down nearly 2 percent, trading at $1.2752.
On Wednesday, May said she had obtained enough support from her senior ministers for the deal to move forward. This came after she also received support from ministers at the EU. But market watchers say there are doubts over whether the draft withdrawal agreement will get parliamentary approval in the country.
Many lawmakers have concerns over the deal which range from the agreements for the border between Northern Ireland and the Republic of Ireland, to how long the U.K. will remain in a customs union with the EU — which could potentially stifle future trade deals it could make.
On Thursday morning, the U.K.’s opposition Labour party said the government was falling apart and May had no authority after this latest resignation. A junior minister for Northern Ireland, Shailesh Vara, also announced his resignation on Thursday morning. And after Raab, Britain’s work and pensions secretary, Esther McVey, also resigned from her post.
Commenting on the resignation of Brexit Secretary Dominic Raab, Ian Blackford MP said: “With ministers falling like dominos, it’s clear the Prime Minister lacks the confidence of her cabinet – and has no hope of commanding a majority in parliament for her bad Brexit deal.
Sterling to remain volatile?
Meanwhile, British bond yields fell across the board as the latest Brexit headlines boosted demand for safe-haven assets.
“Raab resigning just now changes the ballgame. Hard to be optimistic on GBP in the short term. But equally Theresa May has survived much worse. It’s whether we get a flood of resignations to follow,” Jordan Rochester, a global foreign exchange strategist at Nomura, said in a research note to clients Thursday.
“The news flow looks to be turning materially against Theresa May substantially. The market loves a narrative and he is a big resignation so hedging flow (for the parliament vote/leadership threats) will see GBP head lower,” Rochester said.
He added that this volatility could be short term, however. “The end outcome is that Theresa May finds a way and the deal gets approved, the U.K. avoids the political pitfalls. But we’re in for a messy way through the next few hours.” If the deal sees Parliamentary passage, the currency could hit anywhere between $1.35 and $1.40, analysts told CNBC Wednesday.
