Three-Week Low for Pound-to-Dollar Exchange Rate as Markets Eye Guidance from Tonight's Parliamentary Votes

Above: Mark Francois says the ERG cannot back the government in tonight's vote. Image courtesy of Parliament TV.

- FX markets eye next votes on Brexit in parliament due tonight

- Pound under pressure against the Dollar

- Trend appears negative short-term

Pound Sterling is under pressure against the U.S. Dollar on Thursday, February 14 with markets eyeing a number of votes in the UK parliament today which will see members of the House of Commons asked to vote on Prime Minister Theresa May's Brexit strategy.

May will ask parliament to back a government motion calling on parliament to green-light the government's current Brexit strategy, namely the seeking further concessions from the EU on the issue of the Irish backstop contained in the Brexit deal's Withdrawal Agreement.

The motion, if passed, would effectively mean parliament is backing the Prime Minister's decision to seek further negotiations with the European Union.

However, as with all things parliamentary, there are complications.

"GBP/USD will take some guidance from today’s vote by the U.K. Parliament on Theresa May’s Brexit strategy. Reports suggest supporters of a hard Brexit within the Conservative Party will vote down May’s strategy," says Joseph Capurso, a foreign exchange strategist with Commonwealth Bank of Australia's global investment banking unit.

Reports suggest Brexiteers in the European Research Group - a parliamentary coalition of Conservative party MPs who advocate a clean break from the EU - will not vote for the government motion on Brexit tonight because it implicitly rules out a no-deal Brexit.

"We cannot vote for this as it is currently configured because it rules out no deal and removes our negotiating leverage in Brussels. The prime minister, if she went through the lobbies for this tomorrow night, would be voting against the guarantees she has given in the Commons for months. It is madness," says Mark Francois, vice chair of the European Research Group.

ERG members do not not necessarily vote as a bloc, but the government has such a small majority that, even if some of them were to vote against or abstain, she would be in real danger of losing.

A defeat would have no direct, practical impact but could undermine May’s credibility with the EU. Another perspective to be conscious of is a defeat would also signal to the EU that they must yield those much-needed concessions on the Irish backstop if their Brexit deal is to pass through parliament.

Ahead of the vote the Pound-to-Dollar exchange rate is trading with a soft tone and is quoted at 1.2834 which represents a new three-week low for the pair.

No substantive progress on Brexit is expected in Brussels over the course of February with EU officials now pointing to the scheduled 21-22 March European Council that sees all the EU's leaders gather.

This suggests any concessions might come late in the day for the UK, which implies the Pound could be in for a stagnant few weeks.

"Despite the ticking clock, we still think 'no deal' is the least likely Brexit scenario, however, we are raising its probability from 10% to 15%," says Mujtaba Rahman, Managing Director, Europe at Eurasia Group.

With the prospect of a 'no deal' Brexit still being given an outsider's chance by the market we don't expect any substantive decline in Sterling on the government losing tonight's vote.

"Volatility in GBP should remain low because the U.K. Prime Minister has stated there will be another vote in two weeks on 27 February," says Capurso.

While volatility should remain low we note the trend in GBP/USD appears to be negative and we could therefore suggest with confidence that the downside is preferred on the basis that the 'trend is your friend'.

"A decline through 1.2800 would suggest a broader shift back towards the range lows around 1.2500-1.2440, with 1.2660 notable resistance ahead of there," says Robin Wilkin, a foreign exchange strategist with Lloyds Bank.

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