May’s Brexit Deal Defeat Fuels Uncertainty, Sterling Rises

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On Tuesday, Sterling rallied more than a cent from the day’s lows against the dollar after lawmakers in Britain overwhelmingly defeated the Brexit divorce deal of Prime Minister Theresa May.

With the 230-vote margin of defeat far more than what markets were expecting, the pound surged on some expectations that the scale of the defeat might force the lawmakers to look for other options.

A co-director of global income group at Eaton Vance in Boston, Eric Stein, stated: “The sterling rebound may also simply be short-covering as there is still a massive amount of uncertainty for UK assets.”

While the pound has been supported in the past days on growing expectations that the United Kingdom will avoid a ‘no-deal’ Brexit, the defeat on Tuesday offers no clear path ahead.

With the clock ticking down to the 29th of March, the date that is set in law for Brexit, the country is now caught in the deepest political crisis in half a century.

The sharp changes in the pound also fuelled volatility in UK-focused exchange-traded funds. A U.S-listed MSCI UK ETF was up by as much as 0.4 percent.

The head of macro strategy at London-based SSGA, Timothy Graf, stated: “The two big takeaways for markets from this are that one, this deal is dead and, two, lawmakers might have to explore other creative options to avoid a no-deal Brexit.”

However, analysts warned against reading too much into the bounce. The defeat on Tuesday opens an array of options, including a vote of no confidence that is called by the Jeremy Corbyn, the opposition Labour leader, that is scheduled to be held at 1900 GMT on Wednesday.

A UK economist at UBS Global Wealth Management, Dean Turner, stated: “UK assets will continue to be vulnerable to the political volatility and we don’t expect this will subside until a concrete conclusion emerges.”

The parliament voted 432-202 against the Brexit deal of PM May, the worst parliamentary defeat for a government in modern British history. Scores of May’s own lawmakers – both Brexiteers and supporters of EU membership – also joined forces to vote down the deal.

The pound was down as much as 1.2 percent prior to the vote. It was briefly down by 1.5 percent before sharply rebounding to $1.2823, down by 0.4 percent on the day.

The speed of the rebound also reflects the large underlying short positions in the currency markets, which most investors chose to unwind before fresh political developments.