Pounds reaction muted as Theresa Mays Brexit Deal Rejected

Following a brief spike higher, the pound moved southwards after ministers voted against Theresa May’s Brexit deal in another sizeable defeat. The pound edged lower as investors shifted their focus to what next for Brexit? With no immediate end to Brexit uncertainty, instead an increasingly clouded picture, which could potentially now last a lot longer, the pound sold off.

242 ministers voted in favour of the PM’s deal, and 391 rejected it, meaning Theresa May lost by a more than convincing majority of 149 votes, down though from the stonking 230 defeat in January. Tuesday’s vote included 75 Conservatives who voted against her. After two attempts of trying to push the deal through Parliament, the House of Commons has made it clear that this Brexit deal doesn’t not measure up. 

The pound’s reaction was a damp squib in comparison to the action that we have seen across the day. The muted spike as Theresa May defined the next steps and the edging lower thereafter, pales into comparison with this mornings surge on Brexit optimism and the subsequent sell off as nerves frayed ahead of the vote.  

Next Steps
Parliament will now decide, in a free vote whether to allow the UK to leave the EU without a deal. A free vote allows ministers to vote according to their own beliefs rather than following a party policy. It is widely assumed that Parliament will vote against a no deal Brexit. The assumption that a no deal Brexit will be rejected tomorrow is keeping the pound comfortably above $1.30.  A rejection of no deal Brexit tomorrow will bring us to extension territory and a more interesting vote on Thursday.
On Thursday the ministers will vote on whether to extend Article 50. With just 17 days to go until Brexit and the default option being a no deal Brexit, the UK will need to request permission to push back the March 29th deadline.

Leading up to today any suggestions of extending Article 50 have lifted the pound; boosted by hopes of a better deal or even Brexit being cancelled. However, one particular area of surprise in the EU’s reaction to the meaningful vote outcome was the reluctance of the EU to extend Article 50. There has been a widespread assumption that the EU would happily extend Article 50 without any discussion. Suddenly that has been thrown into doubt, raising serious questions about what the UK can actually achieve even if ministers vote to extend Article 50. The negotiation with Brussels to extend Article 50 could be much, much harder that the UK was expecting, and this is also hitting demand for the pound.
The coming days will see pound volatility remain high. $1.30 will continue to prove to be a solid support, which we expect to hold as long as a no deal Brexit appears avoidable.