LONDON/HONG KONG (AFP/REUTERS) - Sterling tumbled Thursday (Oct 17) after British Prime Minister Boris Johnson's key ally in Parliament - Northern Ireland's Democratic Unionist Party (DUP) - said it "could not support" his plans for a Brexit deal, throwing a spanner in the works just as Britain and the European Union were closing in on an agreement.
After years of wrangling, the two sides said Wednesday they were edging towards the basis for a treaty allowing Britain to avoid a no-deal exit, which many observers warned could be economically catastrophic.
With both teams working through the night, EU negotiator Michel Barnier said there had been "good progress, and work is ongoing", while France's deputy foreign minister said Thursday a deal was "within reach but is not guaranteed".
Meanwhile, Johnson and European Commission President Jean-Claude Juncker spoke by phone on Thursday in a last-ditch attempt to strike a Brexit deal ahead of an EU summit.
Juncker, the head of the EU's executive arm, "just spoke to Boris Johnson. Every hour and minute counts" before the summit, EU spokeswoman Mina Andreeva said in a tweet.
"We want a deal," she said, adding that contacts between the EU and UK negotiating teams are continuing just hours ahead of the meeting of EU leaders in Brussels.
There had been optimism that a deal was in the offing, just two weeks before Britain is due to leave the bloc, as they worked towards a solution on the vexed question of British-ruled Northern Ireland.
But Northern Ireland's DUP dropped a bombshell hours before the start of a crunch EU summit Thursday, saying it cannot support the plan.
"As things stand, we could not support what is being suggested on customs and consent issues, and there is a lack of clarity" on Value Added Tax, the DUP, which props up Johnson's government, said in a statement on Twitter.
"We will continue to work with the Government to try and get a sensible deal that works for Northern Ireland and protects the economic and constitutional integrity of the United Kingdom." DUP leader Arlene Foster had met Johnson several times this week to discuss the progress of talks and had described as "nonsense" previous reports that she was ready to give way.
On Thursday, Britain's housing minister Robert Jenrick said that Britain will leave the European Union on Oct. 31 if no Brexit deal is reached with the bloc.
Jenrick said a Brexit deal could still be done despite Northern Ireland's Democratic Unionist Party saying it cannot support current proposals from Johnson and the European Union.
"As we are negotiating this arrangement in Brussels as we speak, at the same time we are continuing to take forward at pace preparations to leave without a deal if necessary on the 31st of October," Jenrick told BBC radio .
The minister said there is not a deadline for publishing the legal text on a Brexit deal before parliament could vote on it on Saturday.
"There isn't a deadline, we want to get a deal done, so we're not going to set ourselves an artificial deadline, we're not going to compromise the negotiation," he said.
German Chancellor Angela Merkel said on Thursday that there has been significant movement in negotiations on Britain's departure from the European Union and a Brexit deal is still possible but that goal has not yet been reached.
"There has been movement in recent days, significant movement ... so we are on a better path than before but, today I must say very clearly, we have not reached the goal yet," Merkel told Germany's Bundestag Lower House of Parliament.
"So I cannot say today how the European Council will end tomorrow," she added ahead of a summit of European Union leaders. "But I can say that we will not allow hate and violence to flare up on the island of Ireland again."
The pound, which earlier in the day was hovering at five-month highs around US$1.2877 sank to US$1.2750 before edging back slightly, while it also lost ground to the euro.
The DUP are against any deal that would tie Northern Ireland to EU rules but cut the rest of the United Kingdom loose.
FED RATE HOPES
Jeffrey Halley, senior market analyst at Oanda, said: "The DUP holds the balance of power and thus their voice counts much more than it otherwise would. Without them, the entire edifice crumbles, and we are back to the Groundhog Day Brexit extension and negotiation cycle." In early trade, London's FTSE added 0.1 per cent, Paris was flat and Frankfurt eased 0.2 per cent.
In Asia, most markets were in the red, with traders unable to take advantage of weak US retail data that raised the chances of another Federal Reserve interest rate cut. Comments in the Fed's Beige Book update on the economy also pointed to a slowdown.
Hong Kong added 0.7 per cent but Shanghai finished 0.1 per cent lower and Tokyo lost 0.1 percent.
Sydney sank 0.8 per cent, Singapore shed 0.7 per cent and Seoul retreated 0.2 percent, with Wellington and Manila also off. There were gains in Taipei, Mumbai, Bangkok and Jakarta.
Speculation about a possible US rate cut provided support to higher-yielding currencies against the dollar, with the Australian dollar 0.6 per cent up and the South Korean won 0.1 per cent stronger. The Thai baht, the Mexican peso and the South African rand also posted healthy gains.
Oil prices fell after data pointed to a sharp rise in US stockpiles that reinforced worries about the impact on demand from the China-US trade war and the global economic slowdown.