Sterling plummeted to a 20-month low on Monday after Theresa May pulled out of a parliamentary vote on her Brexit deal with Brussels, declaring that she would seek a more palatable deal with the EU through renegotiation.
With less than four months to go before the March 29 deadline to quit the block, the British prime minister remains stuck between hostile parliamentary arithmetic and European governments determined not to grant too many concessions to its first departing member.
However, rumours the government would delay the vote quickly spread and, as a result, the pound nosedived two cents to a low of $1.2555 against the US dollar. It extended its losses versus the euro, trading down 0.7 per cent at 90.18 pence - its weakest since early September.
Despite warnings over the size of the government rebellion and predictions in the press that the vote would be pulled, the decision caught the foreign exchanges by surprise. “When the market thought uncertainty had finally peaked, May’s delay proves it wrong,” said Simon Harvey, FX Analyst at Monex Europe.
While it has been clear for weeks that Mrs May would lose Tuesday’s landmark vote, it was thought she would use the defeat as leverage against Brussels. After a dramatic conference call with her cabinet, she decided however to deferred the parliamentary showdown in favour of a plea to her negotiating partners.
There was little sign that tensions would ease with one opponent saying she had exhibited “pathetic cowardice”.
Speaking to Parliament, the prime minister said that while there was general support for her deal, she accepted that one particular issue, the Northern Ireland backstop, continued to attract "deep concern." Despite having initially voted Remain, Mrs May said she "was determined" to do all she could to deliver a Brexit for the British people.
Mrs May will now attempt to negotiate a fresh deal with the European Commission and gain some flexibility over the main sticking point, the assurances over the Irish border. “From listening to those views it is clear that while there is broad support for many of the key aspects of the deal, on one issue – the Northern Ireland backstop – there remains widespread and deep concern,” she said. “As a result, if we went ahead and held the vote tomorrow the deal would be rejected by a significant margin.”
As Mrs May recognised any compromise would involve an assurance over the border, or backstop, her room for manoeuvre is limited. Brussels said on Monday it would be impossible to change the terms of the deal and Irish leader Leo Varadkar said it was the “only agreement on the table” and had the support of the 28 EU governments. However the small Northern Ireland party that props up Mrs May’s minority government said the prime minister must secure the fundamental changes. "Does she not get it by now?” asked Nigel Dodds, deputy leader of the Democratic Unionist Party. “The withdrawal agreement is unacceptable to this House."
For months the opposition and dozens of Mrs May’s Conservative party colleagues have savaged her approach to Brexit and, as such, it appeared nigh on impossible the deal presented could make it through the Houses of Commons. A particular point of contention within the current agreement on offer could keep the UK in a EU customs union until the two sides had found a way to keep the Irish border open.
Scottish first minister Nicola Sturgeon tweeted that she would support a vote of no confidence if lodged by the official opposition, the Labour Party. She said her Scottish National Party could “work together to give people the chance to stop Brexit in another vote.”
“This shambles can’t go on – so how about it?” she added.
Earlier in the day the European Court of Justice had ruled the UK could unilaterally revoke the decision to withdraw from the EU, planned for March 29 2019. The ruling had raised hopes for Remainers, particularly those who are calling for a so-called people's vote, a second referendum on the issue could be called.
However, rumours the government would delay the vote quickly spread and superseded news of the ECJ vote. “This was the last thing that you want to have as an investor. Theresa May’s decision has created more chaos for the UK Now, we are back to square one and the re-negotiation of the current deal may never happen,” said Naeem Aslam, Chief Market Analyst at Think Markets UK.
The UK economy had already had a difficult day when it was announced GDP slowed to 0.4 percent from 0.6 percent in the third quarter, with a sharp fall in car sales particularly to blame.
Opposition leader Jeremy Corbyn said the deal was so “disastrous” the “desperate step of delaying it at the 11th hour” had been taking by a government incapable of “functioning.”
Mrs May “ploughed ahead when she should have gone back to Brussels to renegotiate or called an election so the public could elect a new government that could do so.”
European Parliament Brexit coordinator Guy Verhofstadt tweeted: “I can’t follow anymore…. Just keep in mind we will never let the Irish down…. It’s time (the UK government) make up their mind!”
Despite a volley of rumours in the media to the contrary, ministers had insisted until the 11th hour the parliament vote would go ahead. Early on Monday foreign secretary Jeremy Hunt had told reporters in Brussels the government had no intention of delaying Brexit beyond March 29. Despite the ECJ’s ruling, cabinet Brexit-supporter Michael Gove told the BBC: “The clear intention of the government is to make sure that we leave on March 29."
Even in the face of widespread dismay from all parts of the House of Commons, an estimated 110 Conservative MPs said they would vote against the deal.
Pro-Europe lawmakers have also opposed the Brussels deal.
“The prime minister claims to have listened to MP's and the country. The truth is she's only listened to a small group of advisers, just like she did in calling last year's general election,” said Liberal Democrat MP, Layla Moran. "It's time for this decision to be put in the hands of the public. The people need the final say over Brexit.”