The British pound reversed gains as the attorney general said the U.K. risks remaining the stuck in the backstop arrangement with the EU over the Irish border even after Prime Minister Theresa May secured assurances to her Brexit deal before lawmakers vote once again on her Brexit deal today.
Sterling fell 1% to $1.3023 at 7:22 a.m. ET, after rising as high as $1.3289, and weakened 1.1% to 0.8644 per euro.
Attorney General Geoffrey Cox said in a statement, "[T]he legal risk remains unchanged" that there is "no internationally lawful means of exiting the Protocol's arrangements, save by agreement."
The attorney general's guidance makes it more likely that May's deal will fail again. She lost by a record 230 votes in January.
Overnight, the U.K. and EU agreed on a "joint instrument with comparable legal weight" to the withdrawal agreement prohibiting the EU from applying the Irish backstop indefinitely. The backstop was a proposed solution to avoid a hard border between Northern Ireland, which is part of the U.K., and the Republic of Ireland and has been a sticking point for British parliamentarians as it risked indefinitely locking the U.K. into a customs union with the EU. As per the new arrangement, if the EU still applies a backstop, the U.K. can challenge it through arbitration and suspend it.
Even before the attorney general's legal advice, the lack of a time limit on the backstop and a unilateral exit mechanism made it unlikely it would get backing from Brexit hardliners, James Smith, developed markets economist at ING Research, wrote in a note.
Meanwhile, it is unclear if the Democratic Unionist Party of Northern Ireland, May's key political ally without which she loses her majority in parliament, will throw its weight behind the revised deal, "which could prove crucial in persuading more rebel Conservative MPs to come on board," MUFG currency strategist Lee Hardman wrote in a note.
If the deal is defeated, parliament will proceed March 13 to vote on whether the U.K. should exit the EU without a deal. If that vote fails, they will vote March 14 on whether Brexit should be extended beyond the current deadline of March 29.