May Wins Confidence Vote, Pound Sterling Firms as Markets Cheer attempts to find Cross-Party Consensus on Brexit Deal

Image © Pound Sterling Live.

- May win in confident vote said to be good for the Pound

- In address to nation May says working across political lines to secure deal

- UK's Hammond sees potential for Article 50 being delayed

- Pound-to-Euro exchange rate @ 1.1308, Pound-to-Dollar exchange rate @ 1.2895

Prime Minister Theresa May's government has this evening won a vote of no confidence called against it by the opposition Labour Party.

The vote was won by a majority of 19, a comfortable win given the current parliamentary arithmetic.

The win now allows May to push forward and bring to the House of Commons revised plans that will allow parliament to ratify the EU-UK Brexit deal.

The outcome was expected by markets and therefore the impact on Pound Sterling was minimal, ensuring the currency maintains the advance realised over the past week.

May has called on parliamentary leaders of the various parties to meet with her to work on a solution that can allow the House to pass the Brexit deal.

In an address to the nation outside 10 Downing Street May says she has already started meetings with other political parties, and all appear to be receptive, except the Labour Party whose leader Jeremy Corbyn has indicated he will not engage.

The developments, while not having an immediate impact on Sterling, are still ultimately constructive for the currency.

"This win for Mrs May - which follows her previous confidence vote win in December – will eliminate, for the time being, the risk of a general election being called. It therefore removes the risk of an incoming Labour government," says Nigel Green, founder and chief executive of deVere Group.

The British Pound was bid higher in mid-week trade as foreign exchange traders continued to discount the prospect of a disruptive 'no deal' Brexit taking place on March 29 after the EU-UK Brexit deal was shot down in parliament in a 230 MP defeat on Tuesday night.

Foreign exchange traders believe the defeat of the deal actually reduces the prospect of a disruptive 'no deal' Brexit taking place as a parliamentary majority in favour of a softer Brexit, or no Brexit at all, are able to flex their power.

May wins confidence vote (325-306) and says ready to start cross-party talks, find a #Brexit consensus within Parliament. Will table amendments and make statement on Monday. The show continues...$GBP holds gains at 1.2860 (briefly spiked on announcement) pic.twitter.com/VkqRm6z9sW

— Viraj Patel (@VPatelFX) January 16, 2019

The gains in Sterling come after Prime Minister Theresa May told MPs she will consult widely on what kind of deal could command a majority in the House, should her government see of a no confidence vote on Wednesday night. Speaking in parliament on Wednesday May said she wanted to find out what sort of Brexit deal could win the support of lawmakers.

"The exercise is about listening to the views of the house, about wanting to understand the views of parliamentarians so that we can identify what could command the support of this house and deliver on the referendum," she said.

In response to a question from Conservative MP Kenneth Clarke, May said the government would be open to calling for a delay to Brexit beyond March 29 only if Parliament can united behind a plan. This is the first admission that the government will delay Brexit in order to avoid a 'no deal', an outcome that will surely bolster Sterling.

Furthermore, reports suggest arch-Remain Conservative MP Dominic Grieve would table two bills on Thursday that would provide for a new referendum taking place at some point in the future, confirming the tide to be turning against the Brexiteers who advocate for a pure 'no deal' Brexit.

"The two most likely outcomes in our view are still a second referendum or some modified deal. The second referendum is still the most potentially positive GBP outcome (given the way the question might be structured and how opinions divide across the three options). The amended deal scenario is GBP-neutral/small positive. Finally the risk of a no deal exit persists (the biggest downside GBP risk) but remains low," says Elsa Lignos at RBC Capital Markets.

May will then draw up a new wish-list and take it to the European Union who will likely offer further concessions. We have heard from a host of European leaders over the past 24 hours that the door is open to May, and markets believe this should help her ultimately push their deal through. "We expect PM May will seek further concessions from the EU, and then see a run-off between the government's deal and alternatives, in particular a second referendum," says strategist Hans Redeker at Morgan Stanley.

We do know that a legal guarantee that places a time limit on the Northern Ireland backstop is an absolute minimum required to get Conservative party rebels and the government's DUP partners to back the deal. But, the EU say while they are open to further talks, renegotiating the legally binding Withdrawal Agreement is not on offer.

Therefore, it could be that only a deal that can command support from the Labour party has a shot of success, and this will almost certainly mean softening already existing red lines.

Reacting to the events of the past 12 hours, investment bank Goldman Sachs have said they believe the prospect of a 'no deal' Brexit has faded further, with analysts at the Wall Street giant saying they believe a variant of the current Brexit deal will ultimately get through the House.

Tuesday's vote skews the outcome further towards a softer, later Brexit or no Brexit at all say Goldman Sachs.

"We maintain our base case that a close variant of the current Brexit deal will ultimately command a majority in the House of Commons. But, in our view, today’s developments skew the risks to that base case further towards a softer, later Brexit - or no Brexit at all," says Adrian Paul with Goldman Sachs in London.

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Another Wall Street name sees limited risk of a 'no deal' Brexit occuring at this time.

"We see a low risk of a 'no deal' outcome (5%), given the opposition of parliament. But we have little conviction on which of the alternative options – referendum, the current deal or early elections – will be chosen. We expect greater clarity by early February," says Morgan Stanley's Redeker.

On a conference call held with business leaders after the vote, Chancellor of the Exchequer Philip Hammond talked of delay, suggesting backbenchers had found a mechanism to take 'no deal' Brexit off the table.

We believe the defeat now gives Theresa May the chance of going back to Europe and asking for legal assurances that the Northern Ireland backstop contained in the Withdrawal Agreement can only ever be temporary.

The EU have until now rejected giving any such legal assurance, but May must be clear this must be forthcoming if their deal is to succeed and any kind of stability in the EU-UK relationship secured. Germany's Foreign Minister Heiko Maas tells Deutschlandfunk Radio this morning that further talks will ultimately circle back around to the Northern Ireland backstop, and that "we need to find a solution, and we need it fast".

So we have a senior German politician again repeating that talks are coming (it was Maas who first let the cat out of the bag in Brussels on Tuesday) and that these talks will ultimately centre on the Irish question. Other European leaders (Tusk, Juncker, Rasmussen) have all said since the deal's defeat they await further clarity on what the UK wants, but we believe they know exactly what it is the UK wants: a legal guarantee that the Northern Irish backstop will be temporary.

Maas also says if there were a request to delay the Brexit start date from the UK, it would be discussed "constructively".

Today sees parliament debate a no confidence motion in the government, something the government is widely expected to swat aside with no signs of rebellion being detected on Conservative backbenchers and firm support being signalled by Northern Ireleand's DUP.

"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".

Looking further ahead, Lignos says Tuesday night’s vote may have increased the chances of a second referendum but it also increased the chances, however low, of a 'no deal Brexit' – "both tails are now a bit fatter".

"Despite the staggering scale of the loss in the Meaningful vote and the Labour party triggering the no confidence vote, the FX market found a silver-lining and GBP strengthened," says Petr Krpata with ING Bank N.V. in London.

Krpata says there is an increased likelihood that Prime Minister Theresa May is likely to seek cross party support for the next deal, with the perceived odds of the Article 50 extension rising.

Indeed, we hear this morning that Germany's Foreign Minister Heiko Maas says Europe will approach any requests for an extension of Article 50 constructively.

ING estimate that the probability weighted outcome for GBP has marginally improved - "by one big figure for both EUR/GBP and GBP/USD based on our estimates," says Krpata.

Krpata warns the near term price action for GBP will remain "very bumpy".

"There is still a non-negligible likelihood of hard Brexit (around 20% in our view) with its potential detrimental outcome for GBP. This makes outright long GBP positions tricky," says the strategist.

Mikael Olai Milhøj, Senior Analyst with Danske Bank, says he is expecting EUR/GBP to stay in the 0.88-0.9060 range until further Brexit clarification.

This means the Pound-to-Euro exchange rate will remain in a 1.1360-1.1037 range, suggesting the limit for the pair is at 1.1360 in Milhøj view.

Milhøj says an extension of Article 50 would be positive for GBP as it reduces the risk of a ‘no deal’ Brexit, "while pressure on GBP might increase due to rising uncertainty as 29 March moves closer".