Pound pares losses after May's historic defeat

Theresa May suffered a landslide Brexit defeat. Opposition leader Jeremy Corbyn tabled a vote of no confidence tomorrow. The pound rebounded from initial losses as traders are seeing the defeat as paving the way for an extension to Article 50 rather than the start of a no deal Brexit.

As was widely predicted, Theresa May’s Brexit deal was crushed in the Parliamentary vote. The House of Commons overwhelmingly rejected Theresa May’s Brexit deal, which briefly sent the pound to the low of the day at $1.2672.

The results show a humiliating defeat for Theresa May, with 432 voting against the deal and just 202 voting in favour. This was a historic loss, which encouraged the leader of the opposition party, Jeremy Corbyn to table a vote of no confidence in Theresa May tomorrow.

Market reaction
Following a knee jerk sell off, buying interest in the pound picked up, boosting sterling over 1.5% versus the dollar through $1.2885. 

Against the euro the pound putting a spectacular performance, EURGBP dived from a day’s high of 0.8986 to just prior to the vote to 0.8853 shortly after, a surge of over 1.4%

A similar reaction was seen in GBPJPY, with a low of 137.39 being struck before the ensuing rally saw the pound peak at 140.03. 

Traders take the optimistic view
The fact that the pound pared losses quickly and rebounded strongly indicates that traders are seeing this defeat as an opening towards an extension of Article 50, rather than the start of a no deal Brexit. However, questions remain as to whether the pound will be able sustain these levels. That depends greatly on what comes next. 

It is difficult to imagine that the pound will be able to move much above $1.30, given the level of uncertainty that remains. Whilst traders are taking the optimistic view and starting to believe that there is more of a chance of Brexit just not happening at all – that is definitely not the case right now. There is still significant ground to be covered before we even get close to Brexit collapsing.

Theresa May to win a vote of no confidence
Reports suggest that Theresa May will survive the opposition leader Jeremy Corbyn’s vote of no confidence on Wednesday evening, after her party rebels have guaranteed support to her. This then leaves the question what next for Brexit? 

Theresa May has until Monday to say how she intends to proceed. Given the sheer scale of her defeat, this isn’t about a few adjustments to the deal but a thorough overhaul in its approach. With the clock ticking an extension of Article 50 looks almost certain. We can expect volatility to remain in the pound for the foreseeable future.

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