Sterling plummets to 21-month low as UK government pulls Parliament’s vote on Brexit

Prime Minister Theresa May leaving 10 Downing Street, London, ahead of Prime Minister's Questions. 

Victoria Jones – PA Images | PA Images | Getty Images
Prime Minister Theresa May leaving 10 Downing Street, London, ahead of Prime Minister’s Questions.

Sterling slumped to a 21-month low as British Prime Minister Theresa May confirmed that the government would delay a Brexit vote in the parliament, that had earlier been scheduled for Tuesday.

Earlier on Monday, the pound fell to $1.266, a level not seen since April 2017, following several media reports that May had gathered senior aides at a Monday morning meeting in 10 Downing Street to discuss pulling the vote.

It further fell to $1.2616 after PM May addressed the parliament, bringing the losses to nearly 1.7 percent against the dollar on the day. The pound also extended losses versus the euro, trading down by 0.7 percent to 90.18 pence.

May claimed that while there was broad support for her deal, the issue of the Northern Irish backstop remained a concern and she would return to European counterparts to renegotiate the deal.

“A worrying tone is emanating from the debate in the House. We already knew that delaying the vote to avoid a catastrophic loss for the government would have opened the door to an internal Conservative party leadership challenge,” Stephen Gallo, European head of FX strategy at BMO Capital Markets told CNBC via email on Monday.

“Now, however, many MPs appear to be using their rhetoric to pave the way for a parliamentary no confidence vote in the PM and her government. So that door is still open. We knew this too, but the FX market appears to be reacting to the realization of it, Gallo added.”

Sterling to remain volatile

Sterling is down more than 7 percent since the start of the year. Currency analysts have predicted that the currency could remain volatile in the next few months due to the uncertainty surrounding the Brexit vote.

“The market might not like this increased uncertainty, (GBP making new lows) and we will have to wait to see if whatever her plan is now is any more liable to succeed,” Jordan Rochester, forex strategist at Nomura said in a note before May’s address to the Parliament.

“But this has to be the reasoning. As we said last week, procrastination risks are on the rise once again,” Rochester added.

The process to leave the bloc has proven long and rich in technical details. The departure date has been scheduled for March 29 next year — meaning that negotiators have just under four months to conclude negotiations on aspects such as the movement of people and goods across the border between Northern Ireland and the Republic of Ireland.

Meanwhile, sterling has seen a lot of volatility since the U.K. voted to leave the European Union on June 23, 2016. While the initial moves on the day were dramatic, plunging from the highs of $1.50 to a 31-year low of $1.32, the currency is down nearly 13 percent since the Brexit vote.

What is the Meaningful Vote?

The vote in the House of Commons is termed the “meaningful vote” and is to allow lawmakers to have their say on the terms of Brexit that the EU and British government had previously agreed.

May’s motion that she seeks parliamentary backing includes a “withdrawal deal” that outlines the divorce and a “future relationship” document that spells out the areas of negotiations that she says are needed to resolve how the EU and U.K. will interact.

May has claimed it is the best deal she could get to satisfy a deeply divided country, which in June 2016 voted 52 percent to leave and 48 percent to remain in the EU.

But MPs from all sides have publicly refused to back the deal. Her deal with Europe is seen by some as a sellout to the ideals of Brexit, reducing Britain’s influence while staying within many of the EU’s rules.

And many of those who oppose Brexit didn’t like the deal either. They have argued that it will reduce Britain’s ease of trade with the world, repel global talent and increase the cost of living.