Pound plummets on fears of no deal

The pound suffered its sharpest slide since the 2017 general election after the City was shaken by no-deal Brexit fears as MPs revolted against Theresa May’s draft divorce deal with the EU.

The wave of resignations from the Government triggered a slump in UK-exposed stocks and sent sterling tumbling towards a 17-month low. Markets across Europe were gripped by fears that the deadlock in Westminster would lead to a cliff-edge Brexit or usher in a Jeremy Corbyn government following another snap election.

Business leaders from the City had overnight welcomed the draft divorce deal keeping close ties with Europe. But the concessions proved too much for Brexiteers, leading to four resignations from Cabinet, including Brexit Secretary Dominic Raab, and more turbulence on markets in Europe.

As letters of no confidence in the Prime Minister piled up, the pound tumbled as much as 1.9 per cent against a trade-weighted basket of currencies, its worst performance since last year’s election that severely weakened May. Sterling endured heavy losses against the dollar and euro, slumping as much as 1.7 per cent to $1.2719 and 1.8 per cent to €1.1257 respectively.

The pound could drop a further 3-4 per cent to new 2018 lows against its major rivals if a ‘‘credible leadership challenge’’ emerges, warned Chris Turner, ING head of strategy.

Stocks across Europe headed lower as risk appetite retreated on global markets still reeling from a tumultuous year of political and trade uncertainty. Banks and housebuilders led a sell-off in shares exposed to the UK economy.

Stewart Cook, head of sales at Berenberg, explained that the ‘‘initial surprise’’ on City trading floors to the resignations ‘‘started to exaggerate the moves on an already nervous market’’.

‘‘When we had the first resignation come through from Raab, everyone was like, ‘Wow, this is getting serious.’’’

The FTSE 100 survived the selloff to inch up 0.1 per cent at 7038.01 points as investors regained their composure late in trading and the index’s heavyweight international stocks were buoyed by the pound’s fall boosting their earnings.

The bond market was also rocked. The gap between 10-year and 30-year gilt yields had its biggest one-day widening since 2009 as investors pared back interest rate expectations amid worries over the health of the UK economy in a no-deal scenario.