Theresa May to face vote of no confidence this evening

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12 December 2018

thomasdodds

Currency traders woke up to the news this morning that UK Prime Minister Theresa May would face a vote of no confidence from her Tory MPs later today, two days after she unexpectedly pulled the vote on her draft Brexit agreement.

T
he call for a no confidence vote is not a particularly surprising one. It has been rumoured for a number of weeks that more Conservative Party MPs were ready to submit formal calls for a leadership challenge. This number passed the 48 that were required to trigger the vote on Tuesday evening, with Theresa May informed of the fact late last night. Tonight’s secret ballot will take place between 6-8pm UK time and, while it is unclear how long the vote will take, the result of the vote is likely to be known not long after.

Sterling has, so far, taken the news mostly in its stride and has actually risen against the US Dollar so far this morning. This portrays to us just how little a chance the market believes the vote will pass. A majority vote will be required to oust Theresa May, although a host of Tory MPs, including a number key cabinet members, have already voiced their full support for the current leader.

With no suitable replacement and little to no time for a new PM to achieve anything meaningful on the Brexit front, we think that the vote will pass comfortably in May’s favour. It is worth noting that betting markets are still placing a near 70% implied probability that May will be in charge come Brexit day.

It goes without saying that the passing of the no confidence vote would see a sell-off in the Pound. That being said, should we somehow get to a point where a staunch Remainer takes the reins as PM, the chances of no Brexit at all would rise and Sterling with it.

Higher US yields lift Dollar, ECB to meet tomorrow

Away from the UK, the US Dollar rose for the third straight day, buoyed by a move upwards in Treasury yields.

Investors have reversed some of their recent bearish bets against the greenback in the past few days, having sold the currency following comments from Federal Reserve Chair Jerome Powell that suggest the US central bank is likely to pause it’s easing cycle in 2019. That being said, investors are now ramping up their expectations for a hike at this month’s meeting. This time next week will see the release of the latest ‘dot plot’ from the Fed, which will give us a decent indication as to the pace of hikes next year. Following Powell comments, we are expecting a fairly sharp downward revision in projections from the September meeting.

In the meantime, tomorrow’s ECB meeting could be key. As we have mentioned earlier this week, we think that we see room for Euro appreciation should Draghi not strike as dovish a tone as the market is anticipating.