Sterling rockets higher after May opens door to Article 50 extension

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27 February 2019


The Pound marched towards the 1.33 level against the US Dollar this morning, its highest level since September, after Prime Minister Theresa May formally opened the door to a delayed exit from the European Union.

s was widely anticipated going into May’s speech, the Prime Minister stated that MPs would have a chance to vote on a) whether the UK leaves the EU without a deal and b) whether the UK’s departure from the EU is delayed, should her withdrawal agreement be shot down in another parliament vote.

May’s proposal sent the UK currency rocketing sharply higher, with the Pound rallying by around one percent over the course of trading yesterday. The chances of a ‘no deal’ Brexit, seen as the worst case scenario for both the UK economy and Sterling, have fallen sharply in recent weeks and now seem highly remote following May’s comments. The implied probability of such an outcome, as measured using bookmaker odds, now stands at around 16%, significantly lower than a matter of weeks ago (Figure 1).

Figure 1: Implied Probability of ‘No Deal’ Brexit (2018 – 2019)

With the vast majority of MPs firmly against a ‘no deal’, we think it’s very likely that we’ll see a majority in favour of a delayed Article 50 following the next parliamentary vote – set to take place no later than 12th March. This likelihood, and the formal support shown by the Labour Party for a second referendum, could ensure that the rally in the Pound has further to run in the coming days. The UK currency is currently trading around its highest level in almost two years against the Euro.

Safe-havens rise, Powell urges need for patience

Aside from Brexit, arguably the main story in financial markets was the risk-off mode induced by the shooting down of two Indian jets by Pakistan in a clear escalation of the Kashmir conflict. Unsurprisingly, this sent investors away from riskier assets and into the safe-haven Japanese Yen and Swiss Franc, as is customary during times of geopolitical uncertainty.

As far as EUR/USD was concerned, the pair broke out of its recent range, rising towards the 1.14 mark after Federal Reserve Chair Jerome Powell reiterated the need for patience in deciding whether to raise interest rates further in the US. During his semi-annual testimony to Congress, Powell stated that recent data had ‘softened’, although the recent government shutdown would only have a ‘fairly modest’ impact on US GDP.

Powell continues his two-day testimony later today.