Crushing commons defeat rallies pound

The government loses Brexit vote by a margin of 230 MPs, with today’s no confidence vote now key for the pound.

Previous Day's Market Highlights

As expected, the main event of the day came late in the evening when the government were defeated in the meaningful vote on the Brexit Withdrawal Agreement by a margin of 230 MPs – the biggest defeat for a government since 1924. In the build up to the vote, sterling had slid throughout the day, trading down by around 1% against the euro and the dollar before the result was announced. However, once confirmation of defeat had come through, the pound reversed course and rallied to close unchanged from its opening levels. While the result now spells more uncertainty for the UK, the rally in the pound was likely caused as investors anticipated that MPs would do all they could to avoid a no-deal Brexit including the possibility of an extension to the article 50 negotiating period as well as the result having been largely priced in.
 
Sterling is likely to be supported in the near-term by hopes of an extension to the negotiating period although market participants will need to weigh this up against the ever-approaching article 50 deadline. Although PM May has commented that her strategy is not to run down the clock and that she will be holding cross-party meetings in an attempt to reach a consensus in parliament, the downside risk of a no-deal Brexit still remains on the table at this stage.
 
The response to the vote from the EU was as expected, with officials reacting with dismay to the vote and suggesting that the UK needs to clarify its intentions as soon as possible. While officially no reference to an extension of the negotiating period was made, German press were reporting that EU officials were open to an extension until the end of June.

Away from Brexit, US PPI inflation figures were released as forecast, showing an increase of 2.5% on a year-over-year basis while German GDP ticked up at 1.5% in 2018 – slightly allaying concerns over an economic slowdown in the eurozone. In other markets, European equities slid 0.3% due to jitters before yesterday’s vote while markets in the US added around 1% with the tech sector leading the way.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1286 1.1293 1.1018 2.44%
GBP/USD 1.2861 1.2931 1.2440 3.80%
EUR/USD 1.1395 1.1570 1.1280 2.51%
GBP/AUD 1.7843 1.8190 1.7556 3.49%
GBP/NZD 1.8841 1.9025 1.8389 3.34%
GBP/CAD 1.7038 1.7392 1.6756 3.66%

Today's Market Highlights

Once again, political developments are set to be the main driving factor behind the pound with attention focusing on this evening’s motion of no confidence in the House of Commons, tabled by opposition leader Jeremy Corbyn. A vote on the motion is due to be held at around 7 o’clock this evening though it is widely expected to go in favour of the government, with both the hard-Brexiteer European Research Group and May’s confidence and supply partners the DUP both set to vote in favour of the PM.
 
Assuming that the government survives today’s vote, PM May is set to deliver her ‘plan B’ to the House of Commons by Monday which will outline the next steps that the government plan to take on Brexit. This is likely to take the form of cross-party meetings to gain a consensus among MPs as well as the likelihood of further negotiations with Brussels in an attempt to find a deal that is more palatable to the House of Commons. There is also the possibility of an extension to the negotiating period as well as further no confidence motions being brought by opposition parties as the negotiations progress.
 
Elsewhere, UK CPI inflation for December is set to show a dip to 2.1% on a year-over-year basis with the drop largely being due to the fall in energy prices. With inflation returning to the BoE’s 2% target, the chance of interest rate increases (albeit post-Brexit) looks set to decrease. Also set to be released are US import and export prices for December as well as the weekly crude oil inventories. Finally, investors will keep one eye on the ongoing government shutdown in the US which continues to show no signs of being resolved.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP CPI (y/y) 2.1% 2.3%
1:30pm USD Import Price Index (m/m) -1.3% -1.6%
3:30pm USD Crude Oil Inventories -1.5m -1.68m