British Pound Recovery vs. Euro and Dollar Eases as Scale of May's Win Disappoints

Image (C) Number 10 Downing Street.

- Pound steady on Thursday morning

- May wins confidence vote

- May commits to stand down before next election

- Further gains from here to be limited says one analyst

The British Pound is steady Thursday with markets digesting the implications of Theresa May's confidence vote win.

The currency had been trading sharply higher on expectations she would win the vote as it ensures some continuity going forward and, according to some analysts, decreases the odds of a 'no deal' Brexit shaping up in March 2019.

However, the currency has faded off its highs after it was revealed 117 parliamentarians voted against the Prime Minister which is considered by many commentators to be a big number. We expect the UK currency to consolidate in the near-term as a result.

"It's a terrible result for the Prime Minister, it really is," says Jacob Rees-Mogg, leader of the European Research Group, who spearheaded the no confidence vote in May. Rees-Mogg says May should go to the Queen and resign her position saying she clearly does not have the confidence of the House of Commons.

Markets were looking for a more commanding win that would signal to rebels that their best prospect of getting any kind of Brexit now lies with backing the Prime Minister's deal. So while some uncertainty has been erased by May's win, it is not enough to stoke the fires of the nascent Sterling recovery:

The Pound-to-Euro exchange rate is seen trading at 1.1096 having been as higher as high as 1.1148, the low is at 1.1026.

The Pound-to-Dollar exchange rate is trading at 1.2608, the pair had been as high as 1.2670 with 1.2477 the low.

"The Pound had already rallied in expectation of the result, so the drop back from the highs is not surprising. But now the focus for Sterling goes back to Brexit, and there the outlook is not at all promising," says Chris Beauchamp, Chief Market Analyst at IG.

The Conservative party civil war over Brexit is by no means over and we see little chance of the party coming together to allow her deal to pass through Parliament.

The British Pound had put in a strong rally midweek against key currencies as markets bet Prime Minister Theresa May would to win a vote of no confidence in her leadership, ensuring a sense of continuity at an uncertain time for British politics. “Markets love certainty. So confirmation that the Conservative Party cannot remove Theresa May from her post for the next 12 months should be welcome news," says Lee McDarby, Corporate IP Managing Director at Moneycorp.

That May has won will therefore not be news to the market, hence Sterling's rally might have peaked.

"It would appear that UK PM May has survived a no confidence vote. So now we're back to where we were a few days ago: May's deal (soft Brexit), no deal (hard Brexit), or second referendum (to not Brexit)," says Christopher Vecchio, Senior Currency Strategist at DailyFX.

Ahead of the vote May is widely reported to have told fellow Conservative parliamentarians she will not seek to lead the party into the next election.

The concession is seen by some commentators as a necessary to command any decisive win in the confidence vote.

"A Tory MP just told me PM’s promise not to lead the party in 2022 election has convinced 20-30 who were thinking about voting against her to back her on that basis," says Kate McCann, Political Correspondent at Sky News.

The market nevertheless likes the prospect of continuity at the top of the UK government during the crucial Brexit period, even if there remains significant uncertainty as to the exact shape of the Brexit deal that is to come.

"Now that the vote is out of the way, we can go back to where we were 24 hours ago, and this is no comfort for investors. There is a deal ready to go, but it is still not going to pass Parliament," says IG's Beauchamp.

According to Philip Shaw, Economist with Investec, "if Mrs May does indeed win and stay on, we expect to see Sterling rally. However Sterling is likely to be far from done on its Brexit roller-coaster ride."

Most analysts and commentators are in agreement that the Prime Minister - whether it is May or any successor - will still face the same issue that the Parliamentary arithmetic does not support the deal as it stands.

"Sterling is expected to enjoy a modest and temporary rally were PM May to survive the confidence vote. Modest, because PM May is widely expected to win the vote, and temporary because she still has to put her withdrawal agreement to parliament and face likely rejection," says Chris Turner at ING Bank N.V. in London.

ING suspect the GBP/USD exchange rate would struggle to sustain a rally above the 1.2650/2700 area.

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