Sterling was trading at €1.1418 this morning as analysts brace themselves for any potential breakthrough in the Brexit deadlock. Remain and Tory MPs are meeting Brexit Secretary Steve Barclay this morning to discuss the so-called Malthouse compromise, as an alternative arrangement to the Irish backstop. Hardline eurosceptics in the European Research Group and Remain-supporting former ministers will form the Alternative Arrangements Working Group (AAWG), which Downing Street said would meet regularly with Mr Barclay and senior officials.
ERG deputy chairman Steve Baker, former Northern Ireland secretary Owen Paterson and Yeovil MP Marcus Fysh will join forces with former education secretary Nicky Morgan and ex-cabinet office minister Damian Green to examine the feasibility of the so-called Malthouse Compromise.
This has been drawn up in meetings coordinated by Housing Minister Kit Malthouse and recasts the backstop as a “free trade agreement-lite”, with a commitment on all sides should there be no hard border and an extended transition period to December 2021.
It requires Prime Minister Theresa May to replace the Agreement’s backstop with “alternative arrangements” to keep the Irish border open after Brexit.
Last week, she told the Commons it was a “serious proposal that we are engaging with sincerely and positively”.
Pound Live: The British currency is holding firm against the euro ahead of a crunch Brexit meeting
Mr Baker told the Press Association on Sunday: “After a positive conference call today running through the Government’s questions, I’m more confident than ever we can land the Malthouse compromise, including the indefinite Better Deal backstop protocol.
“I hope our meetings with Government are as constructive as they should be because Malthouse is the only game in town if we are to achieve a deal.
“I just hope engagement is as sincere as the PM’s words at the despatch box led us to expect.”
However the pound dipped against the US dollar, slipping beneath $1.31 having lost much of its early momentum towards the end of last week.
Pound Live: The British currency is expected to remain volatile against the euro
Traders are warning the pound will remain volatile as Brexit uncertainty remains high, with the Prime Minister yet again desperately attempting to convince the European Union to relent on its key Irish backstop stance.
The Bank of England will hold a crunch meeting this week and decide what to do with the country’s interest rates in a move that could shape the direction of the currency for the months ahead.
But according to a report from Scotiabank, FX analysts have warned Britain is sliding quickly towards a no deal Brexit as Mrs May refuses ro acknowledge the UK needs an extension to the country’s exit from the EU.
The analysts said: “Downing St pushed back on reports last night that a number of cabinet ministers thought a delay to the Brexit process would be needed, with Number 10 insisting that the UK would leave the EU on March 29 and that the UK had not requested an extension to Article 50.”
Pound Live: Theresa May told the Commons the Malthouse Compromise was a ‘serious proposal’
A solution to the Irish border remains the pivotal sticking point in the Prime Minister securing an orderly exit from the bloc.
But Scotibank are sceptical over whether the government can remain united to complete a deal before the March 29 deadline.
It said: “The UK has its work cut out if it is to satisfy both the desires of Conservative, pro-Brexit MPs and its international obligations – namely a commitment to keep the Irish border open – in time for a deal to be reached and agreed to by the end of March.”
On Friday, the pound has dropped against both the euro and US dollar as UK manufacturing data disappointed currency traders.
Pound Live: Steve Baker is ‘more confident than ever’ over the Malthouse Compromise
The IHS Markit-CIPS UK manufacturing purchasing managers’ index (PMI) fell to a three-month low as Brexit uncertainty continued.
It showed a reading of 52.8 in January – down from the 54.2 recorded in December.
Rob Dawson, director of IHS Markit, which compiles the survey, said: “The start of 2019 saw UK manufacturers continue their preparations for Brexit.
“Stocks of inputs increased at the sharpest pace in the 27-year history, as buying activity was stepped up to mitigate against potential supply-chain disruptions in coming months.
“There were also signs that inventories of finished goods were being bolstered to ensure warehouses are well stocked to meet ongoing contractual obligations.
“Despite the temporary boost provided by clients’ pre-purchases and efforts to build-up stocks, the underlying trends in output and new orders remained lacklustre at best.
“Growth of new order inflows slowed sharply, and new export orders were near-stagnant, contributing to the weakest trend in output since the month following the EU referendum.”
Reacting to the release of the data, the pound traded at €1.1386 at 11am on Friday – down half a percent from opening levels of €1.1452.
Michael Brown, Senior Analyst at Caxton FX, said the pound is set for more weeks of volatility until uncertainty is removed from Brexit.
He said: “While the markets have absorbed some uncertainty based on a low probability outcome of a ‘no-deal’ exit, the pound suffered a setback earlier this week, falling by around 0.8 percent after amendments that would have ruled out such an outcome were not passed in Parliament.
“Sterling is unlikely to significantly extend its gains in the coming weeks unless official confirmation of an extension to Article 50 emerges and as the political uncertainty continues.
“Overall, it is likely that the Pound will begin to drift lower ahead of the second ‘meaningful vote’ if the current stalemate continues with a reversal of this month’s gains becoming more likely.”