Why the British pound rallied after crushing defeat of May's Brexit deal - and where it is headed

On crunch Tuesday, the pound rose 0.2 per cent to US$1.2888 after falling as much as 1.5 per cent to US$1.2670 before the vote.
On crunch Tuesday, the pound rose 0.2 per cent to US$1.2888 after falling as much as 1.5 per cent to US$1.2670 before the vote.PHOTO: REUTERS

SINGAPORE - The British pound bounced back from losses after Prime Minister Theresa May's Brexit agreement with the European Union (EU) was resoundingly voted down in Parliament - despite most pundits predicting that a landslide defeat would send it sliding further.

There are two likely reasons for this:

First, using the benefit of hindsight, some are saying that the recent display of animosity in the House of Commons to the idea of a no-deal or "hard Brexit" with no agreement on how to exit the EU, something markets are most afraid of - has convinced currency traders that this outcome is very unlikely.

Second, the other new line is that this crushing defeat for Mrs May's Brexit deal, makes no Brexit - at least not by the March 29 deadline - a growing possibility.

"The probability of a no deal has diminished while the chances of a delay in Article 50, a second referendum or even at the margin no Brexit at all have all increased," Mr Jeremy Stretch, head of Group of 10 currency strategy at Canadian Imperial Bank of Commerce told Bloomberg News. "The consequence of the latter has prompted sterling to rally despite the PM suffering the worst parliamentary result in a century."

The deal needed support from more than half of the British Parliament. Instead, 432 lawmakers voted against it while just 202 voted in favor of the deal - the biggest margin of defeat in the country's history.

British citizens voted in favor of leaving the EU in June 2016, a decision that sent ripples across global financial markets. Since then, the pound has sunk some 13 per cent against the US dollar on fears that the departure would badly hurt the country's economy.

 
 

On crunch Tuesday, the pound rose 0.2 per cent to US$1.2888 after falling as much as 1.5 per cent to US$1.2670 before the vote.

The opposition Labour party has said that all options, including campaigning for a second referendum, remain on the table if there isn't a general election. That would be the best case for sterling, boosting the currency to US$1.35, according to analysts surveyed by Bloomberg. The worst case - leaving with no deal - would see the pound drop to US$1.15.

"We could see some market participants begin to think that the next move will be in favor of a 'No Brexit' outcome," said Mr Ned Rumpeltin, European head of FX strategy at Toronto-Dominion Bank told Bloomberg News. "But there is still a lot of blue water between here and there."