"The Pound Should Remain Supported": Analysts Views on Sterling's Outlook

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- GBP supported after government tastes defeat in Brexit vote. 

- As markets focus on Wednesday Commons vote of confidence.

- But the outlook for the British currency is as uncertain as ever.

The Pound was trading higher against most rivals Wednesday after an earlier House of Commons vote on Prime Minister Theresa May's Brexit proposals saw the government dealt the largest parliamentary defeat on record, but the outlook for the currency is as uncertain as ever.

Members of parliament voted by 432-to-202 to reject the European Union Withdrawal Agreement Wednesday, marking the most significant loss of any UK government ever, which led the opposition to propose a ballot of confidence. 

MPs will vote on whether to bring down the government Wednesday evening. Analysts say the government is likely to win the vote but opinions vary greatly on what might happen next. 

There is no majority in parliament that favour May's Brexit proposal, or any other proposal, and calls from opponents of Brexit for a second referendum or another election are growing louder. There is now a significant group in parliament seeking desperately to stop an exit from the EU.

However, the default legal position is that unless the Withdrawal Agreement is approved the UK will automatically exit the EU on March 29 and default ot trading with it on World Trade Organization (WTO) terms. 

Most economists say that would be bad for the economy, while the post-referendum reaction shows it will almost certainly be bad for Sterling.

Below is a compilation of analyst views on the likely outcome of the parliamentary process and forecasts of what it might mean for Pound Sterling.

The Pound-to-Dollar rate was -0.09% lower at 1.2859 during noon trading Wednesday but is up 0.92% this year, while the Pound-to-Euro rate was 0.15% higher at 1.1292 and has risen 1.58% thus far in 2019.

Stephen Gallo, European head of FX strategy, BMO Capital Markets:

"We understand that so many domestic and international parties in this process don’t want a “no deal” scenario, but right now we cannot see a clear path towards preventing one. We would assign the scenario which sees Article-50 extended with a path towards new elections the remaining 55%."

"From clients and colleagues we keep receiving the same question: “why is the GBP so stable?” Although the process is complex, the answer is not: the FX market is not going to force a big move until it is adamantly clear which of the tradeable Brexit permutations is the most likely. The big hedging and investor flow ahead of the current stalemate was done long ago, so participation is low"

"Our best judgement is that the government should face no difficulty in winning the vote (this is another reason why GBPUSD failed to cross below 1.2650 yesterday). Yet few if any investors will want to be caught long and wrong (this is why GBPUSD is not above 1.3000)."

Above: Pound-to-Dollar rate shown at hourly intervals.

"After a win is secured, assuming talks between the EU and the PM take place, new amendments to the current Withdrawal Bill can be tabled early next week, and we assume that this will morph into a plan for a third vote on whatever the new “deal” looks like."

"This is probably as close as we can come to pinning our sights on a “best case scenario” for the GBP. There will be a much smaller relief rally in the GBP if MPs agree on a flimsy “plan B” and to request an Article-50 extension. There will probably be a decline if MPs fail to agree even that."

"This morning we calculated a simple weighted average using our expected GBPUSD levels (after the meaningful vote) and their respective probabilities...The weighted average works out to 1.2855 (spot reference: 1.2860). So this is what it feels like being true heroes."

John Hardy, chief FX strategist, Saxo Bank:

"Prime Minister Theresa May’s unpopular Brexit deal got a worse thumping than many predicted and everyone is now scrambling to understand the next steps. I won’t pretend that I can add much to the noise on what comes next, but agree with the consensus that May avoids falling in a Labour-instigated confidence vote today and that this means no new snap election is in the making."

"Popular sentiment suggests extremely low support for a second referendum. Assuming May survives the confidence vote, we’ll need to shift the focus to what comes from May’s revisiting the deal with her European Union counterparts, now with a bit of added leverage from the size of the deal’s defeat. I would expect the EU leadership keeps its head firmly buried in the sand and little or no sign of a shift in their position."

"There is the issue of an Article 50 delay where the complacent assumption is that it will be extended. Something bothers me about the strength of that consensus, but one could also argue that the endgame results in a “no deal” after all, though a no-deal with a number of bells and whistles to soften the impact, including a long timeline to the implementation of said deal."

"EUR/GBP has punched below the 200-day moving average at time today, a level now more or less the mid-line of the multi-month trading range as the market takes a positive view on sterling despite May’s historic defeat late yesterday. There is plenty more range to trade to the downside if the market continues to unwind its defensive positioning on Sterling on the underlying assumption that neither a Corbyn government or a no-deal Brexit are on the cards."

Prepare for moves in Sterling and order your ideal exchange rate in advance. Foreign exchange specialists at RationalFX will be working extended trading hours today to deliver advantageous rates to their clients. To get in touch with the team at RationalFX, please see here.

Elsa Lignos, head of FX strategy, RBC Capital Markets:

"The govt is extremely likely to win the confidence vote, particularly as the DUP have indicated they will support the govt (strictly speaking they could vote against the govt, boot May out and still avoid a general election but they have limited incentive to take that risk right now).

"May’s plan is to then hold a series of meetings with senior members of other parties to gather “ideas” on what to do next. She has no immediate plans to return to Brussels and is still opposed to a second referendum, so on the govt side, it looks like plan B is almost a carbon copy of plan A.

"On the Labour side the most important thing will be to see if whether having lost the confidence vote, Labour will formally make a second referendum its party policy. That was the plan agreed by the shadow cabinet late last year, but Corbyn has always sounded reluctant.

"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."

Above: Pound-to-Dollar rate shown at daily intervals.

Fritz Luow, analyst, MUFG:

"We knew the government would lose its vote on the Brexit deal but what a defeat it was.

"The pound has rallied in part on the back of the prospect of parliament now being more in control of the direction of travel. However, it must also be added that this defeat has also raised the prospect of a no-deal Brexit on 29th March.

"We expect the government to win the support of parliament. With the DUP, the government has a majority of 13. 2) The focus then quickly shifts to these cross-party meetings to attempt to determine a consensus in parliament on the way forward...We believe all avenues that will be highlighted by these cross-party meetings will require more time and hence an extension to Article 50 will become a clear demand of parliament.

"President Macron yesterday suggested an extension to Article 50, even beyond the EU parliamentary elections, was possible. Time is the biggest downside risk for the pound but assuming we move toward a Plan B and an Article 50 extension quickly, the pound should remain supported."

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Peter Kinsella, head of FX strategy, Union Bancaire Privee (UBP)

"The defeat means May will have to return to Brussels and seek concessions on the withdrawal agreement. However, the scale of the defeat implies Brussels may not see much point in further negotiations.

"The scale of the defeat did not rattle the FX market. May’s assertion to speak with no voters implies she will go to Brussels with a firm idea of what concessions are required to get an amended withdrawal agreement passed.

"The EU is unlikely to offer significant concessions to the UK regarding the withdrawal agreement. There may be further clarification regarding future trade relations, but we do not envisage the EU abandoning its commitment to the Irish backstop having placed so much weight on it over the last 18 months of negotiations.

"Because the UK parliament has not passed the withdrawal agreement and likely cannot pass any realistic agreement, the probability of a second referendum has increased. This is the only way to get the withdrawal agreement around the UK parliament.  However, things will have to worsen before Prime Minister May will call a second referendum. The key take away is that short-term GBP volatility will remain elevated."

Kamal Sharma, strategist, Bank of America Merrill Lynch:

"Though any defeat for a Prime Minister is never welcome, the political fallout has been limitedto some extent by the removal of the key threat of a leadership contest, which now cannot take place for another year.

"The option of a no-deal Brexit is still something that cannot be ignored no matter how low that risk may be. But while some have suggested that an extension of A50 merely prolongs the uncertainty hanging over the UK, we would argue that extension of A50 will be a bullish signal for GBP.

"With further amendments accepted last week, the power shift from the executive toward the legislature has continued as the Governments wafer-thin majority is exposed. In the coming days, we expect to hear more about neutral motions, amendable votes and Parliamentary procedure.

"Part of the reason we think GBP sentiment has improved in recent weeks has been increasing confidence that a no-deal will be avoided, something that we have argued for some time. As Parliament exerts its authority, it has showed that it has the majority to put in place circuit breakers to avoid a no-deal scenario. With the vote now defeated, we expect further motions and amendments by MP's (such as Nick Boles) in the coming days.

"The PM will make a statement within three days, but no-deal does not command a Parliamentary majority. The EU would be satisfied with an off-the-shelf solution such as Norway (or Norway+). Many of the options would not be politically acceptable for her Party, which may leave a people's vote as the only viable option providing Parliament can agree on this path.

 "We continue to think the GBP offers a strong idiosyncratic story that essentially insulates it from global policy/macro trends.GBP should therefore rally in most environments should our scenario of A50 extension and soft Brexit play out."

Ulrich Leuchtmann, head of FX strategy, Commerzbank:

"The set of possible ends to the Brexit drama seems to have become smaller last night. Whereas before there were three elements: 'deal', 'no deal', 'no Brexit' only the options starting in 'no' seem to be left now. Of course 'no deal' (i.e. a disorderly UK exit from the EU) is the less likely of these two possibilities.

"Despite the historical defeat in the House of Commons May is not standing down. She is the Prime Minister who simply will not go away, it seems. There will be a vote of no confidence against her, but our UK expert considers it to be unlikely that it will be successful. One journalist very poignantly put it this morning: Great Britain has a Prime Minister who (a) cannot be removed and (b) is unable to manage the country’s most important political project. That too cannot exactly be seen as GBP positive.

"Yesterday’s market move is an ideal opportunity for all those who want to reduce their GBP positions in view of the no- deal risks." 

Petr Krpata, strategist, ING Group:

"Theresa May’s government faces a battle for survival on Wednesday, although all signs point a no-confidence vote failing to gain enough support amongst MPs. That would switch focus back to the deal, and whether Theresa May will be forced to seek cross-party support for a new direction. One way or another, the pound faces a bumpy ride over coming weeks."

"So far it’s not clear exactly what will happen, but we may see some MPs take the opportunity to push for indicative votes on different specific options. These may well include a vote on a second referendum, as well as on a different Brexit strategy – for instance, a bid to secure a permanent customs union or to go further and push for a ‘Norway Plus’ arrangement (single market access plus customs union)."

"The big question is whether the government will feel obliged to act on these votes if they indicate that a majority of lawmakers favour a certain option. These votes wouldn’t be legally binding, although the political pressure for the government to follow the will of Parliament would likely be immense."

"The near-term price action for GBP will still remain very bumpy. There is still a non-negligible probability of a hard Brexit (around 20% in our view), which would potentially be a detrimental outcome for GBP. This makes the outright long GBP positions tricky, particularly in the context of the upcoming negotiations (domestically among the Conservative party MPs and wider parliament, and externally with the EU) not being straightforward and the associated headline news."

Prepare for moves in Sterling and order your ideal exchange rate in advance. Foreign exchange specialists at RationalFX will be working extended trading hours today to deliver advantageous rates to their clients. To get in touch with the team at RationalFX, please see here.