Pound Tumbles On Renewed Brexit Transition, May Exit Fears

After a tumultuous week for the pound, cable started off on the strong foot because, amid reports that the potential for a vote of no confidence in Theresa May may be losing traction because as DB's Jim Reid noted this morning, "we’re no closer to a leadership contest for Mrs May but it could still happen at any point." The strategist cited The Sun - and their “extensive investigation” - which concluded that 42 lawmakers have sent letters of no-confidence in the PM (48 needed), but noted that overall though more Conservative MPs are disliking the deal - and will vote against it - than will ask for a leadership battle in Deutsche Bank's opinion.

The consensus that is forming amongst  the Conservative MPs who dislike the Withdrawal Agreement is that it can be improved upon. This time next week we will have just had the Sunday EU summit to sign off their side of the deal but its not clear how meaningful tweaks could be made before this and before the agreement goes before UK Parliament in the next 2-3 weeks.

However, after some early strength, cable tumbled sharply on a Reuters headline citing Theresa May's spokesman who said the government believes the UK does not need any extension to the implementation period, but it makes sense to have that option as an alternative to the backstop. Additionally, the Sun's Political editor tweeted that "No10 say PM is adamant transition extension must end before next general election (June 2022). Six months earlier than Barnier... but 6 years after the referendum, to the very month."

This followed news from the FT that there may be an extension: "The EU’s chief Brexit negotiator has proposed extending Britain’s transition out of the bloc until as late as December 2022 in a move that could prolong free movement of people to the UK and big payments to Brussels beyond the next election."

Also this morning, the Times' Matt Chorley tweeted that "Of the 48 needed to trigger a vote of no confidence, 25 have gone public so far.. Senior Brexiteers tell The Times they have "firm pledges" from 50+ MPs to submit letters by this evening, with a vote triggered within two days" suggesting that May could indeed be on her way out.

Meanwhile, another headline also hit ahead of the EU summit this Sunday, according to which "More clarity is needed on Gibraltar's status before Spain's government can back the Brexit deal, minister says." refuting reports that the Gibraltar issue had been sorted. Bloomberg adds some more:

Spanish officials are working with the EU on Monday to try to fix the wording on Gibraltar, according to a Foreign Ministry official. Spain doesn’t like the wording about the future relationship between the EU and the U.K. as it could be interpreted as including Gibraltar. Spain wants it to be clearer.

"We want to make sure the interpretation of this text is clear and shows that what’s being negotiated between the EU and the U.K. does not apply to Gibraltar," Foreign Minister Josep Borrell told reporters.

Spain has requested changes to Art. 184 of the draft Withdrawal Treaty, even though Michel Barnier said that the text shouldn’t be reopened. Its foreign minister said that Spain’s support for the exit deal is contingent on the content of the political declaration on the future ties between the two sides, according to the person, who asked not to be named as the discussion wasn’t public.

In this context, Times Journalist Bruno Waterfield tweeted that "Madrid wants clear language that future trade relationship does not apply to Gibraltar unless UK negotiates it first bilaterally with Spain."

While it is difficult to pin what precisely caused the slump in cable, just around 7am ET cable tumbled by nearly 100 pips and EURGBP rebounded through 0.8900 with RanSquawk speculating that the renewed pressure is due to uncertainty/divergence over extensions to the Brexit transition.

In short, jitters over Brexit are hardly over and cable will remain sensitive to any newsflow in the coming days with Theresa May's fate still on the chopping block.