Pound Sterling in Strong Recovery after Brexit Deal Voted Down

Image © Pound Sterling Live

- Brexit deal defeated by margin of 230

- Government faces confidence motion mid-week, should win

- May intends to reach out to other parties, head back to Europe

- Pound-to-Euro Exchange rate @ 1.1275

- Pound-to-Dollar exchange rate @ 1.2858

The British Pound powered back towards multi-week highs after parliamentarians voted down the EU-UK Brexit deal by a margin of 230, the largest defeat suffered by any government ever, surpassing the Ramsay MacDonald defeat of 1924.

The Labour Party has responded to the defeat by calling a no confidence vote in the government, which will be debated Wednesday. The government is widely expected to win the vote as the Conservatives will in all likelihood back their government while May's partners in the DUP have made it clear they will back the government and vote down Labour's motion.

"For the day ahead, GBP should not move materially if the govt wins the vote as expected," says Elsa Lignos, a foreign exchange strategist with RBC Capital Markets, "if it unexpectedly loses, expect GBP to react very badly".

In the wake of the vote announcement Prime Minister Theresa May says she will seek to engage all parties in the House of Commons to search out the type of deal that could be passed. Based on the outcome of these discussions May says she will head back to Europe and see what the Europeans will be willing to offer.

This appears to have aided the strong recovery in Sterling.

"May’s initial statement after the defeat was more conciliatory than we expected and implies that perhaps she will change direction to try and find a resolution that Parliament supports," says Paul Dales, Chief UK Economist with Capital Economics. "If tonight’s catastrophic defeat for the government leads to a consensus in Parliament, then it could actually mark the start of an upturn for the economy and the Pound."

The Pound's decline ahead of the Brexit deal vote came in thin market conditions and appears to have been technical in nature. The recovery only confirms this is a highly volatile market at present and we expect further ups and downs over coming hours.

"Sterling's reaction is fascinating as the result was expected. GBP/USD rose sharply above 1.28 having touched on 1.27 but was still off the session highs so we must be careful about making pronouncements," says Neil Wilson, an analyst with Markets.com.

We expect Sterling to ultimately gravitate towards the top of recent ranges from here as we await the next moves from the government and Europe.

"It's still worth treating any Sterling crosses with kid gloves. Theresa May was on a hiding to nothing with this deal. But the margin of defeat has really been a surprise - 230 was at the top end of expectations. This is a massive blow for May but she is a tough old nut and it will take more than a whopping defeat to stop her from pressing on," says Wilson.

In short, the declines and gains are not based on any new information, if anything the real news out today concerning Germany being open to "further talks" in the wake of the deal being voted down is a real positive. 

In response to the vote, the President of the European Commission Jean-Claude Juncker ran with this theme saying he urges "the United Kingdom to clarify its intentions as soon as possible". This suggests to us the door is open.

German Foreign Minister Heiko Maas let the cat out the bag this morning after telling reporters outside the European Parliament this morning that, “if it goes wrong tonight, there could be further talks.”

Danish Prime Minister Lars Løkke Rasmussen has meanwhile called on MPs to put a counter proposal forward:

"Very unfortunate outcome of the Brexit vote this evening. One step closer to a chaotic no-deal Brexit scenario. And running out of time. It is now for the British government to suggest a way forward. Meanwhile we will intensify our no deal preparations."

Foreign exchange strategists with UniCredit are expecting Theresa May's Brexit deal to succeed in parliament on a second or third attempt, and this should spark a strong rally in Sterling against the Euro.

"Our base case remains that either the deal on the table or a slightly amended version of it will eventually pass in the Commons, at the second or third time of asking. We would expect sterling to rally across the board once it becomes clear that a deal will be found," says Katherin Goretzki, a foreign exchange strategist with UniCredit Bank.

Goretzki says should the deal pass the Pound-to-Euro exchange rate could rally and break through 1.1765.

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