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Brexit defeat for Theresa May ‘unlikely’ to trigger major GBP moves

Publication Date: 15 Jan 2019 - By Gaurav Sharma (Editor ReachX) By Gaurav Sharma (Editor ReachX)
Actionable
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FX & Rates FX EU ex-UK UK

A parliamentary defeat of UK Prime Minister Theresa May’s Brexit Bill, on the terms and conditions of the country’s exit from the European Union, is unlikely to trigger any major GBP movement, according to a city analyst. 

In a note to clients, Richard Falkenhäll, senior FX strategist at Nordic bank SEB, opined that uncertainty may actually be a “positive factor" for the pound.

 

“A defeat has been broadly anticipated in markets since the agreement with the EU was closed in November 2018 and caused several members of the government to resign. This is why a defeat is unlikely to trigger any major moves in the GBP. In fact, if Parliament approves the [current] agreement, it is likely to cause more volatility as there is a significant risk premium for a no deal withdrawal in the price of the GBP,” Falkenhäll wrote to clients. 

The SEB currency strategist said it is much more important what the next step forward would be. “Based on last week’s amendment related to the ‘meaningful vote’, the government only gets three working days to prepare a plan B. It is very uncertain what the next move by the government will be and as Parliament clearly demonstrated in two votes on amendments last week, there is no majority for a no-deal withdrawal among legislators in the House of Commons.”

This is probably the reason why the GBP has strengthened in recent days, despite the risk of the government’s defeat.

“From a GBP perspective, any alternative going forward that increases the likelihood that the UK in fact stays a member of the EU, like a referendum on the government agreement or even a new election demanding an extension of the withdrawal period, is therefore likely to be supportive for the GBP.”

Although uncertainty is bad for the economy and bad for financial markets, in this case uncertainty may in fact be a positive factor for the British currency as it increases the likelihood the UK will remain an EU-member, Falkenhäll concluded.

Disclosure:

I have no positions in any of the securities referenced in the contribution

I do not use any non-public, material information in this contribution

To the best of my knowledge, the views expressed in this contribution comply with UK law

I agree with the terms and conditions of ReachX

This contribution is for informational purpose and does not constitute investment advice nor is it an offer to sell or buy, nor is it a recommendation for any security.

Gaurav Sharma Editor ReachX

 

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