October 2, 2018 / 8:55 AM / 19 days ago

Sterling at three-week low as government conflict over Brexit escalates

LONDON (Reuters) - The pound slid to a three-week low on Tuesday as a conflict over UK Prime Minister Theresa May’s Brexit plan escalated, with deep divisions on show at the ruling Conservative Party’s conference.

FILE PHOTO: Wads of British Pound Sterling banknotes are stacked in piles at the Money Service Austria company's headquarters in Vienna, Austria, November 16, 2017. REUTERS/Leonhard Foeger

Sterling’s fortunes are being driven by headlines about May’s proposal for Britain exiting the European Union in six months and whether she can persuade the block and senior members of her own party to accept it.

In particular, traders are focussed on a new offer Britain is preparing to make to the EU on the Irish border, aimed at breaking the deadlock in Brexit talks before a decisive EU summit in late October.

At her party’s annual conference this week, May is defending her so-called Chequers plan for leaving the EU. But critics, including former foreign secretary Boris Johnson are openly defying her.

Johnson, the figurehead for the campaign to leave the EU, stopped short of an outright leadership bid to replace May in a speech on Tuesday but tore into her Brexit blueprint.

The pound did not budge in response.

The currency spiked on Monday following a report that Britain might back down on customs checks between mainland Britain and Northern Ireland, a major obstacle to Brexit.

But, by 1445 GMT, sterling had relinquished all of those gains and was trading down half a percent versus a rallying dollar at $1.2979, its lowest since Sept. 10. It was flat versus a weaker euro at 88.88 pence.

The leader of the Northern Irish party which props up May’s government, Arlene Foster, said Northern Ireland must leave on the same terms as the rest of the United Kingdom.

“Foster saying we cannot be separated from the United Kingdom is a reiteration of their position since the referendum and the single most import feature in the whole Brexit negotiation,” Mizuho’s head of FX hedge fund sales Neil Jones said.

A potential downside risk for sterling is the prospect of May’s own party challenging her leadership.

May said on Tuesday she planned to remain in the job “for the long term” as she called on her party to back her plan for Brexit.

“The conference is a minefield for sterling. We’re trading from headline to headline,” WorldFirst head of FX strategy Jeremy Cook said.

“The bias for the pound is to the downside,” he said.

May speaks at her party conference on Wednesday.

Reporting by Tom Finn; Editing by Janet Lawrence

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