Home BrexitPound rallies before no-confidence vote

Pound rallies before no-confidence vote

by LLB Reporter
12th Dec 18 4:25 pm

The pound is trading over $1.26 as traders bet that Prime Minister Theresa May would survive a no-confidence vote on her leadership.

Ranko Berich, Head of Market Analysis at Monex Europe, commented: “If Mayโ€™s boisterous reception in the commons and tweets from Tory MPs are to be believed, May is more likely to survive tonightโ€™s vote than not. This appears to be the marketโ€™s base case, with sterling rallying slightly this morning towards the 1.26 handle against USD despite the possibility of utter disaster in the event May loses and the UK heads for a no-deal outcome.

“Sterlingโ€™s mild upside this morning appears to be driven by optimism that May will cruise through tonightโ€™s vote and emerge strengthened. If she does survive, her situation will be marginally improved as she will be in a stronger position to argue that Parliamentโ€™s options are her deal or no deal. As a result, sterling will likely enjoy a mild reprieve to around the $1.27 level until the next lurching crisis pushes it back down.

“Although the prospect of a marginally strengthened May removes some downside risk for sterling, any relief rally will be limited unless tonightโ€™s vote demonstrates a sudden increase in Tory support for Mayโ€™s deal. As a result, the vote split will be significant for sterling and for markets in general. The breakdown of votes will replace yesterdayโ€™s cancelled meaningful vote in Parliament as a barometer for how many Tory MPs May needs to win over to wrangle her deal through parliament in the new year.

“If May wins the vote by a narrow margin, fears of failure or a vote of no confidence in the commons will intensify, although ironically the impact of a general election on sterling is difficult to call as it would introduce a real prospect of reversing Brexit altogether.

“If May loses tonightโ€™s vote, all hell will break loose for sterling as several scenarios that were previously tail risks become more plausible, with the net effect being to substantially increase the likelihood of a catastrophic no deal outcome. With Raab leading the bookiesโ€™ odds for a replacement and the EU in no mood to give way, markets will have no choice but to price a no deal as a probable outcome and push back expectations of a March deadline. Our view is that this will take sterling down some 3%, with GBPUSD likely to test 2016โ€™s 30-year lows around the $1.20 level.”

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