Meaningful margins will mark the pound's plight

Sterling creeps higher ahead of today’s meaningful vote, with the key for the pound lying in the margin of defeat.

Previous Day's Market Highlights

Sterling gained a further 0.5% across the board on Monday as markets reacted positively to rumours of Conservative party factions voting in favour of PM May’s Brexit deal this evening. Although these rumours were quickly denied, and the pound’s rally faded slightly, markets remained optimistic that the margin of defeat may not be as great as first feared. Rumours of a change of heart were somewhat surprising, especially after the EU’s letter of clarification provided little new information as well as refusing to place a time limit on the Irish border backstop. Despite this, the pound was likely boosted by the EU being open to an extension of the article 50 period.
 
Other majors traded ticked up slightly against the dollar, with both the euro and the yen gaining 0.1% against the greenback. The slight dollar weakness came as optimism over US-China trade talks began to fade and the ongoing US government shutdown started to weigh further on the dollar. On the data front, the calendar was light with only eurozone industrial production figures of note which tumbled by 1.7% on a month-on-month basis, the biggest fall since 2014. The euro was largely unchanged however this could further fuel fears of an economic slowdown in the longer-run.
 
Away from FX, European equities finished the day in the red with the FTSE the biggest loser, losing 1%. Across the pond, US markets recorded their first back-to-back losses of the year, with the benchmark S&P 500 losing 0.5%. Finally, oil prices recorded solid gains, with both Brent and WTI gaining 1.75%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1229 1.1267 1.1018 2.21%
GBP/USD 1.2884 1.2931 1.2440 3.80%
EUR/USD 1.1473 1.1570 1.1280 2.51%
GBP/AUD 1.7852 1.8190 1.7425 4.06%
GBP/NZD 1.8831 1.9025 1.8380 3.39%
GBP/CAD 1.7082 1.7392 1.6756 3.66%

Today's Market Highlights

Today’s pivotal event comes late in the evening, likely from 7pm onwards, with the House of Commons voting on the Brexit Withdrawal Agreement. Despite PM May’s efforts to win concessions from the EU and to win over wavering MPs, it remains almost certain that the deal will be rejected by parliament. Such a decision looks set to cause downward pressure on sterling, though the near-term direction of the pound will depend on the margin of defeat as well as the next steps in the Brexit process.

Losing the vote by a margin of greater than 100 MPs would likely have the greatest market impact, opening up significant downside in sterling pairings, as this would kill off all hope of the deal being passed - even in renegotiated form. However, a margin of less than 100, ideally for the government less than 50, would likely see a more muted market reaction as such a result would likely see PM May head back to Brussels for further negotiations before bringing the deal back for a second vote in Parliament.

Not to be ruled out is the prospect of the opposition Labour Party putting forward a motion of no confidence in the government which, if successful, would trigger a general election. Such an outcome is unlikely however as the DUP have confirmed they would vote with the Conservatives on a confidence motion. 
 
Sterling is likely to remain volatile throughout the day, especially in reaction to any headlines or rumours regarding the potential result in the meaningful vote. There may also be some last-minute attempts from the government to win over any wavering MPs to try and limit the scale of defeat.
 
Barring the Brexit vote, today’s economic calendar is relatively busy with US PPI and eurozone trade balance figures set to be in focus. The former takes on more significance than usual due to the dearth in US data owing to the government shutdown as well as the recent dovish and data dependent shift in the Fed which has placed greater emphasis on economic data. Meanwhile, eurozone trade figures are expected to show the trade surplus remaining largely unchanged.

Finally, a couple of central bank speakers are also scheduled, with both the ECB’s Draghi and Fed voter George due to speak.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Eurozone Trade Balance 13.7bn 14.0bn
1:30pm USD PPI (y/y) 2.5% 2.5%
1:30pm USD Core PPI (y/y) 2.7% 2.7%
from 7:00pm GBP Parliament Brexit Vote Reject