Firmer dollar and Brexit fears push sterling under $1.27

LONDON - 21 May 2019: Sterling fell below $1.27 for the first time since mid-January, battered by dollar strength and expectations that Prime Minister Theresa May will fail to persuade cabinet colleagues to back an amended version of her Brexit withdrawal deal.

Brexit uncertainty has grown in recent weeks after the breakdown of talks between May and the opposition Labour party. That has set the stage for the thrice-rejected fail to fail again if, as planned, it is put to vote in parliament in early June.

Rejection of the deal yet again would likely pave the way for May to be replaced by a eurosceptic Tory, possibly Boris Johnson.

The Times newspaper quoted a senior source as saying the government was prepared for resignations after the cabinet meeting where May would ask ministers to back concessions to Labour party to get a Brexit agreement over the line.

But pro-Brexit hardliners will almost certainly reject any effort to soften the proposal, which could include proposals to stay in the customs union with the EU.

“There’s been an accumulation of disappointments since the start of this month as it’s become clear the talks with Labour had stalled. The possibility of some kind of agreement had generated relative stability since late-February but that’s over now” said Neil Mellor, a strategist at BNY Mellon.

Trepidation about the upcoming cabinet meeting was adding to nervousness, he said, adding: “It’s all much of the same, the uncertainty is what’s doing the damage.”

The pound slipped 0.2% to $1.2688 while against the euro it was down 0.14% to a new four-month low of 87.88 pence.

Sterling’s weakness was exacerbated by the dollar rising to 2-1/2 week highs against major currencies, thanks to safe-haven flows sparked by the trade row

Pound traders are also waiting for the March labour market report due at 0830 GMT.