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Pound Rockets After May’s Crushing Defeat

January 18, 2019 03:42

On Tuesday 15 January, UK MPs voted to reject Theresa May's Brexit deal by a huge majority of 230 votes. At 432 to 202 votes, this is the heaviest parliamentary defeat of a British prime minister in history.

Background on the Brexit vote

The Brexit vote was for May's proposed terms of the withdrawal agreement between the UK and the EU, following the UK's 2016 public vote to leave the European Union.

The withdrawal agreement has taken over two years to negotiate and includes points such as how much the UK will have to pay the EU in order to break their partnership, what will happen to UK citizens living in the EU, as well as EU citizens living in the UK and how to avoid a physical border between the Republic of Ireland and Northern Ireland.

However, the negotiations have been beset by conflict and opposition from the UK House of Commons has rife throughout the negotiations, leading to the original vote being delayed while May sought support for the proposed terms.

Why did the majority oppose the deal?

There were a range of issues regarding the deal, but the biggest claim is that it failed to give back control to the UK of its own affairs.

A second sticking point is what will happen at the Irish border. Both the EU and the UK want to avoid the return of guard posts and customs checks at the Irish border, leading to something called the 'backstop' being drafted in the deal. However, this would mean Northern Ireland would remain under EU rule.

What happens now the deal has been rejected?

After the defeat, opposition leader Jeremy Corbyn tabled a vote of 'no confidence' on Theresa May, which is schduled for tonight, January 16.

If May wins, she will have three days to come up with alternative options for MPs which she said she would on Monday 21 January. However, if she loses the vote then the outcome is less certain - a general election could be called depending if a new government can be formed or a new confidence vote is won.

Following this, many commentators are considering the probability of a no-deal Brexit. Some argue that the chances of a no-deal Brexit are falling as the British parliament exerts more authority over the process, while others are concerned that a no-deal departure from the EU will only become more likely, as the rejection of the proposed deal reduces the available options.

The big question for traders, though, is how will the market react?

The reaction: GBP spikes following 2018 declines

While the markets were prepared for the House of Commons to vote against the Brexit withdrawal plan, the scale of May's defeat took many by surprise. A second surprise, however, was the market's reaction, with the British pound rising following the vote.

As the UK has approached its departure from the EU, the GBP has struggled, tumbling by over 7% during 2018.

Source: Admiral Markets MT5 Supreme Edition GBPUSD, W - Data range: from 30 October 2016 - 16 January 2019, performed on 16 January at 11:53 AM GMT. Please note: Past performance is not a reliable indicator of future results.

However, on the back of the parliamentary vote, the GBPUSD currency pair rocketed over 200 pips higher in just a few hours - up 0.5% following declines of over 1% earlier in the day.

Source: Admiral Markets MT5 Supreme Edition GBPUSD, M5 - Data range: from 15 January 2019 - 16 January 2019, performed on 16 January at 11:51 AM GMT. Please note: Past performance is not a reliable indicator of future results.

While the political situation in the UK is highly uncertain, the market does provide one certainty - volatility is here to stay in the British pound. How are you trading it?

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