Pound slides as MPs vote in favour of renegotiating NI ‘backstop’

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30 January 2019


Sterling fell by around half a percent against the US Dollar yesterday evening after Theresa May pledged to return to the European Union to renegotiate the Northern Irish ‘backstop’ following the latest round of parliament voting.

ost of the key amendments to May’s deal put forward by MPs were rejected, included that put forward by Yvette Cooper that would have opened the door to an Article 50 extension. MPs did, however, narrowly vote in favour of returning to the EU with the intention of replacing the NI ‘backstop’, of which ensures that there is no hard Irish border in the event that an alternative arrangement cannot be reached. An amendment that rules out a ‘no deal’ Brexit was also passed, albeit both these votes are not legally binding.

Theresa May will now engage in cross-party talks with Labour and return to European leaders with the hopes of reaching an alternative arrangement regarding the backstop. A host of EU officials have, however, repeatedly rejected the idea of renegotiating. It looks likely that May will come back empty handed and fail in another House of Commons vote. At this point, we think that the only alternative would be to delay A50, possibly following the next ‘meaningful vote’. This will take place no later than 13th February.

Markets reacted negatively to last night’s voting, possibly due to the rejection of the Cooper amendment and prolonging of uncertainty that will now ensue. With no sign of compromise in sight, markets have also begun discounting the possibility of another Bank of England rate hike in 2019.

FOMC to hold rates steady, remain patient on hikes

Major announcements continue to come thick and fast this week, with the Federal Reserve to release its latest policy announcement this evening.

We don’t expect any significant announcements whatsoever from the Fed this week. Interest rates are almost certain to be kept unchanged and, with no interest rate or economic projections scheduled for release until March, we see no change in the bank’s forward guidance. We instead think that the accompanying commentary will stress the need to be patient and suggest the bank will await additional inflation prints before deciding on the next policy move later in the year.

The Fed’s interest rate decision and monetary policy statement will be released at 7pm UK time this evening.

Australian Dollar jumps on inflation beat

Elsewhere in the currency markets, the Australian Dollar soared after the latest inflation data came in stronger-than-expected. Inflation in Australia rose by 0.5% in Q4 2018, up on the 0.4% consensus. This caused investors to unwind many of their bets that the Reserve Bank of Australia could cut interest rates later this year.

Attention now shifts to this afternoon’s German inflation data, which could give us a decent indication as to the strength of tomorrow’s Euro-wide numbers.