Sterling unmoved after MPs reject Theresa May’s Brexit deal

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13 March 2019

thomasdodds

Sterling suffered from a particularly volatile 24 hours or so in the lead up to Tuesday night’s parliamentary Brexit vote.

T
he currency leapt by around two percent on Monday on hopes that MPs could vote in favour of Theresa May’s Brexit deal, before giving back the entirety of its gains on Tuesday after comments from Attorney General Geoffrey Cox effectively dashed any faint hopes that the deal could pass. The reaction in the Pound to the result of last night’s vote was, however, in the end fairly muted (Figure 1), given its outcome was largely priced in.

Figure 1: GBP/USD (11/03 – 13/03)

The PM’s deal was rejected by 149 votes, roughly in line with market expectations, with only 40 Tory MPs changing their mind from the previous vote in January. While this is much narrower than January’s 240 vote deficit, it was nowhere near enough for a majority in May’s favour. May reiterated plans to hold a vote on whether to first accept a ‘no deal’ and second whether to extend Article 50.

We think that MPs are very likely to reject leaving the EU without a deal in place this evening, given it appears there is little appetite among politicians for such an outcome. We do, however, think that a delayed Brexit at this point is inevitable. MPs will be given the choice to vote in favour of an extension to Article 50 on Thursday, should today’s ‘no deal’ vote fail.

As we have mentioned on numerous occasions, we would expect a rally in the Pound on the news of an A50 extension. The extent of the upward move in the currency would, however, be heavily dependent on the length of the extension. Any delay of three months or more could be good news for Sterling, given it presents the UK with enough time for additional negotiation with the European Union, while opening up the possibility of a second referendum.

Investors eye next week’s FOMC announcement

News out of the rest of the major economies was fairly light on the ground yesterday, with all attention squarely on Brexit. Much of the focus now tentatively turns to next Wednesday’s Federal Reserve meeting, which is shaping up to be a fairly significant event risk for EUR/USD.

We think that a further downward revision to the FOMC’s ‘dot plot’ at next week’s meeting is highly likely, given recent soft US inflation data. We expect the bank’s projections to show that rate-setters now do not expect to hike interest rates at all in 2019. A confirmation from the Fed that its rate hike cycle is effectively over, accompanied with similarly dovish comments from Jerome Powell, could lead to a renewed bout of US Dollar weakness towards the latter stages of this month.

EUR/USD has been on a gradual upward move so far this week. Such an announcement from the Fed could, we believe, help lift EUR/USD back towards our 1.15 end of quarter, and indeed end of year, forecast.