A V Shaped Pound

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Includes: FXB
by: economist88
Summary

The historic defeat of the Brexit vote offers PM Theresa May opportunity.

A no-confidence vote will not prevail and therefore new elections are not called. The May Government can now reach across the parliament to move the UK into a transition phase.

The pound has upside and that could press inflation in the UK down, supporting UK equities and interest rates.

The historic defeat of the Brexit "Deal" by a margin of 230 votes presents a few advantages for PM May:

1. The May Government will highly likely win the no-confidence vote. The opposition doesn't have sufficient majority (and the DUP/ERG and Boris Johnson are all backing May in the no-confidence vote).

2. The large defeat allows PM May to reach across the parliament and not having just to pacify the DUP and ERG. Moreover, Labour MPs will likely fragment and those who want to avoid a 2nd referendum or hard Brexit will move into May's camp.

3. Corbyn is less likely to call for a 2nd referendum rather than a new election. Since the no-confidence vote fails, a new election is unlikely to happen. May could put a 2nd referendum to vote in Parliament but that is also likely to fail.

4. A transition phase to EEA+ (Norway+) has in earnest begun. And an extension of article 50 is very likely to happen quickly beyond the end of March.

5. Meanwhile PM May takes the diplomacy shuttle to Brussels to put 'something' to the House of Commons on January 24th. Although that may look like a copy of her previous deal, markets will trade on potential "concessions" (as the Juncker letter already alluded somewhat to).

And so the pound is trading with a V-shape move. This large kind of defeat has in a way take Parliamentary uncertainty overhanging May's deal away. It also ensured a new election is not likely to happen which therefore lowers UK political risk and uncertainty.

Although the EU says the risk of a no-deal/hard Brexit has risen, the shuttle diplomacy may prove otherwise. Look at how Italy was able to resolve the differences with the EU. The pound has from here more upside.

Figure 1 The V Shaped Pound

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