By Saikat Chatterjee
LONDON (Reuters) – The pound plunged against both the euro and the dollar on Thursday after British Brexit minister Dominic Raab resigned in protest at Prime Minister Theresa May's draft deal for leaving the European Union.
Raab said May's plan threatened the integrity of the United Kingdom and he could not support an indefinite backstop arrangement where the EU held a veto over Britain's ability to exit the bloc.
His resignation fueled a selloff in the British currency which was already struggling to gain traction after May said on Wednesday she had won over her divided cabinet following a five-hour meeting.
In volatile trading, the British currency plunged one percent against the dollar to $1.2839 and 1.3 percent against the euro (EURGBP=D3) to 88.23 pence.
"Raab resigning just now changes the ballgame. Hard to be optimistic on GBP in the short term. " Nomura analyst Jordan Rochester said. "But equally Theresa May has survived much worse. It’s whether we get a flood of (ministerial) resignations to follow."
Those concerns were reflected in the foreign exchange derivatives markets where three and six-month gauges of expected volatility in the British currency remained firm while extreme short-dated volatility indicators edged lower.
That uncertainty was also reflected in the money markets where investors have all but priced out a rate hike by the Bank of England next year.
Bond yields fell across the board with those on benchmark two-year British government debt falling 9 basis points to 0.7 percent.
Big moves this week have boosted volatility in the British currency with realized price swings this week alone averaging about 12 percent annualized on a daily basis, twice that of end-October.