Pound Sterling betrayed the nerves of wary currency traders it oscillated between gains and losses on Tuesday as markets kept an eye on UK Prime Minister's whistle-stop tour to two of the European Union's most influential states aimed at trying and secure a Brexit extension that would prevent the UK leaving the EU without a deal on Friday, April 12.
May is using meetings with Germany's Angela Merkel and France's Emmanuel Macron to ensure any delay offered is not too short and is not subject to humiliating conditions.
For the British Pound, the key risk we feel over coming hours is that the delay granted by leaders is a short one that serves little purpose other than aiding a 'no deal' exit in coming weeks.
May met France's Emmanuel Macron late on Tuesday, in what was certainly the more important of the day's two scheduled events.
A united agreement amongst other European leaders to avoid a 'no deal' it appears Macron has conceded the UK should be allowed more time.
"In the scenario of an extended delay, one year would seem too long for us," said Marcon aide, adding if Britain did delay its exit, it should not take part in EU budget talks or in choosing the next president of the EU executive and the other 27 member states should be able to review its "sincere cooperation".
Rumours of German Concession on Irish Backstop Prompt Bout of Sterling Volatility
The British Pound saw a spike in volatility mid-morning in UK as traders responded to rumours that Germany's Angela Merkel might look at offering the UK a time-limit on the Northern Irish backstop clause contained in the Brexit Withdrawal Agreement.
There was a notable pop in Sterling on reports of what would almost certainly be the one move the EU could make to finally end the Brexit impasse. The Irish backstop clause is widely-held to be the most significant single sticking point in the Withdrawal Agreement holding back its ratification in the EU parliament. Adding a timelimit to the clause would almost certainly see the deal pass the House of Commons, hence why Sterling spiked on the rumour.
"A leading Brexiteer tells me they have been advised that Angela Merkel is willing to put a five year time limit on the Northern Ireland backstop," says Nicholas Watt, Political Editor of BBC Newsnight.
The comments came after Watt was seeking the unidentified source's views on Andrea Leadsom’s comment earlier today that she hoped Angela Merkel would reopen the Withdrawal Agreement. Leadsom is the Leader of the House of Commons and earlier sparked what can be described as ridicule when she unexpectedly suggested she would like to see changes made to the Withdrawal Agreement.
We find the notion that the Withdrawal Agreement can be tinkered with highly questionable, given the stead-fast assurances made right across the EU spectrum that it is not open for renegotiation.
Yet, there does seem to be something afoot, at least according to the foreign exchange market place.
While moves in Sterling following the rumour release wre not massive, there was nevertheless a discernible spike in volatility:
"Spike in GBP on reports Merkel willing to put a 5-year time limit on Irish backstop," says David Cheetham, Chief Market Analyst at XTB UK.
The GBP/USD exchange rate is flat at 1.30535.
Markets appear to believe that a last-ditch move by the EU of the kind being rumoured could be exactly what is needed to get May's Brexit deal across the line, crucially the deal could pass with the Conservative party's backing.
This not only would such an outcome minimises Brexit uncertainty, but it would also likely stabilise the government, both optimal outcomes for Sterling we believe.
"Rumours, speculation, results and reactions surrounding the European Union's Brexit summit on Wednesday will all fuel GBP volatility, already evident in Tuesday's rumour that German Chancellor Angela Merkel suggested a five-year limit to the Irish backstop," says Richard Pace, an analyst on the Thomson Reuters currency desk. "Liquidity is poor with traders sitting on the sidelines, meaning GBP volatility could be easily exacerbated."