Theresa May has seen off another immediate threat to her government, winning a vote of no confidence, launched by leader of the opposition, Jeremy Corbyn. May won the vote by 325 votes to 306, a margin of just 19 votes.
The pound rose immediately following the results; a small relief rally reflecting the short-term stability that Theresa May’s victory provides. Let’s not forge that the markets were expecting May to win. This was the outcome that was priced in since Jeremy Corbyn called the vote of no confidence following May’s humiliating Brexit deal defeat.
Market reaction
The pound had a knee-jerk jump of 0.2% versus the dollar hitting resistance close to the $1.29 handle, before paring almost all those gains shortly after.
Against the euro the pound was faring slightly better jumping close to 0.3% and hitting a 7-week peak of 0.8839 before giving back some ground. The pound is clinging on to gains of 0.25% versus the euro on Wednesday.
GBPJPY climbed steadily across the session on Wednesday, putting in a meaningful move through the psychological level of 140.00. Again, the pound climbed higher versus the Japanese Yen on the results, touching a peak of 140.71 before giving that the last leg higher back. GBPJPY is still hanging on to gains of over 0.4% across the session.
A marginally stronger pound has weighed on the FTSE. Given multinationals make up around 70% of the FTSE index, a stronger pound is a less beneficial exchange rate for these firms, which makes a stronger pound bad news for the FTSE index.
More domestically focused stocks such as house builders and British banks could have a small jump on Thursday’s open.
What next?
Theresa May and traders alike will now turn their full attention to Plan B. Theresa May has until 21st January to put forward the next steps. Plan B could involve:
- Renegotiation with Brussels
- Extending Article 50
- Bringing the deal back for a 2nd vote
- 2nd referendum
- No deal Brexit
Slowly the less favourable options are being shaken out, first the Tory leadership contest, now the general election; which is offering support to the pound. The road ahead is still extremely rocky, which will ensure plenty of volatility remains.
What the market wants?
The market is looking for the removal of the no deal Brexit risk or even better no Brexit. Any steps however large or small taking the UK away from a no deal Brexit will boost the pound. Right now the default option if there is no deal, is that the UK crashes out in a disorderly Brexit on 29th March, a fact which will keep any pound rallies capped.
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