Sterling fell sharply against the U.S. dollar on Tuesday morning after a politician, crucial to Theresa May’s grip on power, suggested that the U.K. is heading for a no-deal Brexit.
Shortly after 10.a.m. London time the pound fell from its session high of $1.308 to $1.302 as investors digested the remarks on Twitter from the Chief Whip of Northern Ireland’s Democratic Unionist Party (DUP), Jeffrey Donaldson.
“Looks like we are heading for no deal,” the lawmaker said, before adding “Such an outcome will have serious consequences for economy of Irish Republic. In addition, UK won’t have to pay a penny more to EU, which means big increase for Dublin. Can’t understand why Irish government seems so intent on this course.”
The DUP is crucial to the U.K.’s ruling Conservative Party as it provides Prime Minister Theresa May with the crucial votes that allow her to hold the balance of power in the British parliament.
Their whip hand over matters relating to Brexit is crucial as the border between Northern Ireland, which is part of the United Kingdom, and the Republic of Ireland, which is set to stay in the European Union, has become the major sticking point in negotiations with Brussels.
“Another day of Brexit intrigue,” Jeremy Stretch, head of G10 FX Strategy at CIBC Capital markets told CNBC via email on Tuesday.
“Today’s Cabinet meeting and DUP warning over the risks of a no-deal outcome comes amidst the realization that the day of reckoning within the committee is coming. The question is can the PM stare down up to 12 Cabinet members who are intent on pushing back against an agreement on N.Ireland which in their opinion risks the UK being contained within a ‘temporary’ customs union arrangement whose rules over which they have no control.”
Stretch further explained that although the DUP warning has pushed sterling back, a rebound may just be on the cards.
“Although the DUP warning has arrested early session hopes of a test of $1.3090/$1.3105 for now should Cable remain above $1.3010/$1.3015 then we would not rule out a GBP rebound should the PM prove able to maintain broad cabinet unity, leaving open the possibility of a deal to be agreed in the next weeks.”
The pound fell after its initiall rally in the last few days on the back of optimism surrounding a Brexit deal to be agreed in the coming months. However, analysts have warned that the currency can continue to see volatility in the run up to a Brexit deal.
“Whether Brexit is hard or soft, Britain is in for a demand shock, a reduction in the rate of potential output growth and a sterling crash,” High Frequency Economics said in a research note on Monday.
“We expect sterling to extend its fall regardless of any Brexit deal.”