UK Parliament Votes on Brexit Deal – Reaction

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 the highly anticipated UK parliamentary vote on 15 January.

May’s EU withdrawal agreement was resoundingly rejected by 432 votes to 202, a crushing difference of 230, 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 crashed from its two-month highs against the US Dollar yesterday afternoon and was briefly sent below the 1.27 level in the immediate aftermath of the announcement in the House of Commons.

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.

GBP/USD &GBP/EUR (15/01/2019)

Source: Thomson Reuters Datastream Data: 15/01/19

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. We also remain optimistic in the long run and think that a somewhat botched and delayed exit from the EU, of which removes the significant downside risk posed by a ‘no deal’, would ensure Sterling is one of the best performing major currencies in the world this year.   

By Enrique Diaz-Alvarez, Matthew Ryan & Roman Ziruk, Ebury

Keywords brexit, Ebury