Yahoo News The pound has recovered after a volatile night — here's where it could go next
Sterling has recovered from a volatile night of trading following the parliamentary defeat of Theresa May’s Brexit deal. But analysts are warning the pound could see more volatility in the coming days as the government faces a vote of no confidence and the path to Brexit remains unclear.
Softer Brexit hopes
The pound was down 0.05% against the euro (GBPEUR=X) to €1.12 on Wednesday morning and was up 0.04% against the dollar (GBPUSD=X) to $1.28.
Sterling had been down by as much as 1.7% against the dollar on Tuesday evening after Theresa May’s Brexit deal suffered the biggest ever parliamentary defeat of a bill tabled by a sitting government.
“Markets think a softer Brexit may start to take shape now the vote has failed, as parliament gains greater control of the process,” Laith Khalaf, a senior analyst at Hargreaves Lansdown, said.
“This is a change in dynamic, as previously government failures have heightened expectations of a hard Brexit, and have weighed sterling down.”
The defeat for the government is seen as putting more power to steer Brexit into the hands of MPs, the majority of whom favour a softer Brexit.
No confidence in the no-confidence vote
The recovery for the pound came despite the opposition Labour party tabling a motion of no confidence in the government shortly after the Brexit bill was voted down.
If the government loses today’s confidence vote, it will trigger a fresh general election — less than three months before Britain is due to leave the EU. However, analysts expect May to survive the challenge.
“All signs point a no-confidence vote failing to gain enough support amongst MPs,” James Smith and Petr Krpata at ING said in a note to clients on Wednesday. They highlighted the fact that the Northern Irish Democratic Unionist Party (DUP), which has been supporting May in government, has pledged to stand behind the Prime Minister in tonight’s vote.
Smith and Krpata added that an extension to the Brexit timeline now looks “increasingly likely.” Chancellor Philip Hammond raised the possibility of delaying Brexit on a conference call with business leaders on Tuesday night.
“The best-case scenario for the pound remains an extension to the article 50 negotiating period which would provide markets with some degree of certainty over the coming months,” said Michael Brown, a senior analyst at Caxton FX.
“Such a move looks set to cause significant upside movement in the pound, with sterling likely to push towards $1.30 and above.”
On a call with journalists on Tuesday afternoon ahead of the Brexit deal vote, Barclays’ head of FX trading James Hassett said the pound could have “significant more upside as the market gets more comfortable.” He said sterling could reach as high as $1.35 if Britain moves towards a softer Brexit.
‘UK markets will stay volatile’
However, analysts across the City warned that investors should still exercise caution when trading the pound given the fluid situation and the lack of clarity around Brexit.
“For the time being, we expect that uncertainty will remain high and UK markets will stay volatile,” Dean Turner, an economist at UBS Wealth Management, wrote in a note to clients late on Tuesday.
READ MORE: How Britain is on the cusp of another general election and a delayed Brexit
“The near term price action for GBP remains very bumpy,” Smith and Krpata said. “The near term price action is likely to remain volatile and headline driven, as has been the case during the past few weeks and quarters.”
Khalaf said: “Clearly there’s still no certainty to be had, and tomorrow’s vote of no confidence provides another pinch point for currency markets, so we can expect further swings in sterling as events develop.
“The reality is there’s no correct price for sterling until there’s greater resolution on the direction of Brexit, what we have right now is a middle ground between competing possibilities.”
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Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.
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