Why did Sterling rally after May’s crushing Brexit vote defeat?

  • All posts
    All posts|Currency Updates
    All posts|Currency Updates|International Trade
    All posts|In The News
    All posts|International Trade
    Charities & NGOs
    Currency Updates
    Currency Updates|In The News
    Fraud
    In The News
    In The News|Press
    International Trade
    Press
  • Latest

16 January 2019

thomasdodds

Sterling rallied by over one percent against the US Dollar on Tuesday evening, despite Theresa May’s EU withdrawal agreement being overwhelmingly shot down in last night’s Brexit vote.

M
ay’s EU withdrawal agreement was resoundingly rejected by 230 votes, the biggest loss in UK government history. While a defeat for May was widely expected and heavily priced in going into the vote, the magnitude of the defeat was much greater than the market had been bracing for and at the very top end of expectations. In the hours preceding the vote, the Pound spent almost the entirety of London trading on the back foot, as investors ramped up bets that Theresa May would lose the meaningful vote by a significant margin. Sterling was then briefly sent below the 1.27 level in the immediate aftermath of the announcement in the House of Commons (Figure 1).

Figure 1: GBP/USD & GBP/EUR (15/01/2019 – 16/01/2019)

This downward move was, however, extraordinarily brief, with the GBP/USD cross quickly reversing its losses and breaking back through the 1.28 level. Paradoxically, we think that investors have taken on the view that the size of the defeat is actually good news for the Pound in the short term. A narrower defeat for Theresa May would have very likely ensured another fruitless bout of toing and froing between the UK and EU that may have culminated in another rushed and ultimately futile second vote in a matter of weeks.

As it stands, we see very little chance that a deal could be forced through parliament in time for the 29th March EU exit date. With the Tory leadership, EU leaders and indeed the Labour Party all resoundingly against a ‘no deal’ scenario, we think that at least a three-month extension to Article 50 is now highly likely. This would allow for more time to negotiate and opens up the possibility of a second referendum.

What’s next for Theresa May?

Unsurprisingly, the leader of the opposition, Jeremy Corbyn, tabled a motion of no confidence in the government. This will now be debated on Wednesday, with MPs expected to vote on whether to back a no confidence motion at 7:00 pm UK time. This opens up the possibility of a general election in a matter of week. Theresa May now has 3 working days to return to parliament with a plan of action and we see it as very likely that this will entail an extension of Article 50. An extension of Article 50 would be positive news for the Pound, in our view, given it increases the chances of an amicable deal being struck and leaves the door ajar to another referendum. We therefore maintain our bullish forecasts for GBP in the short term.

Euro sinks on German growth fears

The Euro was dealt a double blow yesterday, sinking by almost one percent for the day against the US Dollar amid concerns over German growth and the crushing defeat for Theresa May.

Germany’s latest growth figures confirmed our suspicions that the European Central Bank would likely delayed its first interest rate hike since 2011 until very deep into 2019 or, more likely, early-2020. Hit by weaker exports, the German economy expanded by just 1.5% in 2018, its weakest year of growth in five years. While the actual GDP numbers for the fourth quarter of the year will not be released until February, it is expected that Europe’s largest economy expanded in the final three months of the year, therefore avoiding a technical recession as many had feared.

Regardless, these numbers are damning and helped drag the common currency to its weakest position in ten days yesterday. Next up for the Euro will be tomorrow’s crucial inflation numbers. A confirmation that the core rate remained stuck at 1% in December makes us growingly confident of no hikes from the ECB throughout the remainder of this year.