Duncan Donald

Wed, Jan 16

Brexit Parliamentary Vote Update | Why does pound rise after May's deal was voted down?

In last nights much anticipated parliamentary vote on Prime Minister Theresa May’s current Brexit deal we saw a landslide and historic rejection (since 1924) for the deal in its current form.  The humiliation of a 432 to 202 vote should of course cause grave concern over the PM’s tenure in Downing street, however, whilst this remains in question, lets look at the market reaction as a means to gauge the potential outcomes.

On the year we have seen appreciation in the pound so heading into yesterdays vote it was perhaps unsurprising that we saw some of these fresh “long” positions unwind bringing sellers to the market. Coupled with relatively illiquid markets this brought a reversal from 1.2916 to the 1.2700 area heading into the vote.  The appreciation seen on the year came from the market perception the UK was moving further from the worst-case departure from the European Union with “No Deal”.

When the parliamentary vote was announced there was a very short sharp knee jerk dip in the pound which was quickly reversed before a return to the levels seen earlier in the day.  The key question is why would such a heavy defeat lead to appreciation of the pound?

The key factors are firstly the likelihood of the UK leaving the EU by the March 29th deadline seems increasingly unlikely, giving the ruling party more time to negotiate a further deal, pushing back the possibility on the dreaded “No Deal”.  It is thought the departure date will be pushed back until at least July or potentially December this year. Secondly, such heavy defeat will likely be a call to action for the opposition Labour party to trigger a vote of no confidence in the PM.  Having already heard from Irelands DUP and the ERG who to date have been problematic voting against the deal in current form, that they would support the PM in a confidence vote. Its thought this vote could potentially galvanize the support of the PM and buy her some time to go back to Brussels to seek more agreeable terms.

So, with a vote of no confidence being thought of potentially aiding the possibility of achieving a softer Brexit, the last remaining scenario is a call for a UK wide Brexit referendum. With polls indicating that the public would vote against EU departure with the benefit of hindsight it remains a potentially positive outcome for the pound and could bring a reversal of the plunge in value seen since the 2016 vote.  Despite the lack of strength and cohesion shown by the Conservative party it remains unlikely we would see the Labour party fair well should leader Jeremy Corbyn manage to trigger a general election.

Whilst the initial reaction of the markets has been broadly positive there remains a great deal of potential outcomes and there will be no shortage of political wranglings in the coming days. Volatility will remain high in the pound and UK based assets and the actions of the next few days will certainly set the tone for the fate of the current leader. Watch out for comments from Mark Carney the Head of the UK’s Monetary Policy Committee for his take on the vote.