High drama on Brexit sparks volatility for pound

High political drama sparked volatility for the pound on Thursday, as Brexit negotiations entered a crucial 72-hour period that could decide whether the UK leaves with a deal or crashes out on 31 October with no agreement.

The pound and UK stocks spiked against the dollar and euro on Thursday morning, after the UK and EU agreed a new deal on Brexit.

However, prices quickly went into reverse after a string of UK politicians immediately came out against the deal, which must still be approved by parliament.

Johnson urged MPs to back the deal in a crucial vote on Saturday at a press conference in Brussels on Thursday afternoon. European Commission president Jean-Claude Juncker backed the British prime minister and said the EU would not grant another extension if politicians failed to back the deal.

“It has to be done now,” he told reporters.

‘A great new deal’

News of the new deal first broke mid-morning on Thursday. UK prime minister Boris Johnson said in a Tweet: “We’ve got a great new deal that takes back control — now parliament should get Brexit done on Saturday so we can move on to other priorities like the cost of living, the NHS, violent crime and our environment.”

Juncker said it was a “fair and balanced agreement” on Twitter and urged European leaders to endorse it.

“This text should provide legal certainty in every area where Brexit, like any separation, creates uncertainty,” Michel Barnier, the EU’s chief Brexit negotiator, said during a press conference in Brussels on Thursday morning.

Shortly after the announcement, sterling rose 0.9% against the dollar to $1.2935 (GBPUSD=X) and 0.4% against the euro to €1.1624 (GBPEUR=X).

The deal also boosted stocks. The FTSE 100 was up by 0.5%, with UK banks and house building stocks enjoyed a particular bump:

• Royal Bank of Scotland (RBS.L) was up 2.3%.

• Lloyds (LLOY.L) was up 2.1%.

• Barclays (BARC.L) rose by 3.3%.

• HSBC (HSBA.L) was up 1.5%.

• Persimmon (PSN.L) was up 3%.

• Berkley Group (BKG.L) was up 1.7%.

• Taylor Wimpey (TW.L) was up 1.4%.

The FTSE 250 index (^FTMC), which is weighted towards UK-facing businesses, was up 1% shortly after the announcement. The index had been down 0.5% in earlier trade.

News of the agreement also helped US stock futures, which spiked as the news crossed the wires.

• S&P 500 futures were up 0.4% (ES=F)

• Dow Jones Industrial Average futures were up 0.4% (YM=F)

• Nasdaq futures were up 0.4% (NQ=F)

The deal comes after a week of intense and detailed negotiations. It is to be presented to European leaders at a two-day summit in Brussels that begins on Thursday.

Deal still faces big hurdles

However, even if approved by European leaders, the deal still faces a difficult path to ratification. It must be approved by the UK’s parliament, which rejected former prime minister Theresa May’s withdrawal deal three times.

“Parliament's arithmetic remains the main obstacle,” said Marc-André Fongern, an FX and macro Strategist at MAF Global Forex. “The finish line has not yet been reached, despite all optimism.”

READ MORE: pound set for biggest rising streak in more than three decades

MPs will hold an extraordinary sitting of parliament on Saturday to vote on the deal if it is approved by EU leaders. Early signs suggest the new deal may be rejected:

• Labour leader Jeremy Corbyn criticised the deal, saying in a statement: “It seems the prime minister has negotiated an even worse deal than Theresa May’s, which was overwhelmingly rejected.”

• Jo Swinson, the leader of the Liberal Democrats, the fourth biggest party in the House of Commons, said the deal "would be bad for our economy, bad for our public services, and bad for our environment."

• Northern Ireland’s Democratic Unionist Party (DUP) said they back an earlier statement rejecting the proposals.

• Brexit Party leader Nigel Farage told the BBC the deal was “not Brexit” and urged parliament to reject it.

The statements sent the pound into reverse. At 1.15pm UK time, the pound was down 0.5% against the euro to €1.1509 and down 0.1% against the dollar to $1.2795.

“The market is very wary at this point of time as it is still very unclear if the deal will go through on Saturday,” said Sebastien Galy, a senior macro strategist at Nordea Asset Management.

At press conference in Brussels at close to 1.45pm, Johnson told reporters: “I hope very much … that my fellow MPs in Westminster do now come together to get Brexit done.

“Now is the moment for us to get Brexit done and then together to work on building our future partnership.”

Juncker backed Johnson’s call. Asked by reporters if he thought the deal would be approved by British MPs, Juncker said: “It has to.

“Anyway there will be no prolongation. We have concluded a deal and so there is not an argument for further delay – it has to be done now.”

The comments suggest the UK could crash out of the EU with no deal on 31 October if MPs do not vote in favour of the withdrawal agreement.

‘Let us wait and see’

The parliamentary arithmetic kept a lid on sterling. Analysts had said that a deal between the EU and UK could see the pound rise as high as $1.35.

“If [Boris Johnson] manages to get it through parliament, we should see a wave of ‘risk-on’ trades coming into UK market,” Artur Baluszynski, head of research at investment manager Henderson Rowe, said.

“However, let us wait and see all the details and then let the markets decide how likely it is for the UK parliament to accept it. For now, expect some positive momentum in sterling and domestically focused asset classes.”

Deutsche Bank analyst Oliver Harvey said that without the DUP’s support, the government would likely fall short by 42 votes.

The pound had been under pressure earlier on Thursday morning after the DUP rejected a draft text of the deal. Support from the DUP is crucial for getting any deal through parliament, given the ruling Conservative Party’s lack of majority in the House of Commons.

The European Commission has published the full details of Boris Johnson's deal. You can find the revised Withdrawal Agreement here.