Sterling bloodied more than number ten

The government’s latest Parliamentary defeat should bring deeper pain in the near term for sterling than the government.

Abstainers swing for May

The market has certainly been unsettled by speculation that pro-Brexit Conservatives abstained. If doing so helped seal the fate of the government’s ‘Plan B’ motion, which was rejected by 303 votes to 258, it could point to the hard-line wing of the Tories resuming an obdurate stance from which it appeared to retreat in recent weeks. The more immediate worry is that Theresa May’s assertion to the EU that she can persuade MPs to vote for her plan, given changes, has been undermined. On the face of it, an incentive for Brussels to pull out all the stops to get a revised deal across the line has been removed

But even if members of the Brexit-supporting European Research Group, chaired by Jacob-Rees Mogg, did abstain, Thursday still looks to be more of an embarrassment for the Prime Minister than fatal for her strategy. Most importantly, tonight’s votes are non-binding. Again, as per, 29^th January, such conditions should bolster Theresa May’s well-observed tendency to push ahead with plans regardless of opposition.

Meaningful Vote II

The tone of the amendments selected for voting was an early warning of a lack of ‘crunch’. As seen when MPs voted at the end of January, appetite to wrest control from the government remains ambivalent at best. All amendments were defeated. The logic of Theresa May’s promise of another ‘meaningful vote’ on 27^th February is now clearer. The pledge appears to have removed pressure on Tory rebels and remain supporters across party lines to begin pulling the rug out from under the government immediately. Even before voting began, amendments dwindled down to three, with remain-supporting Anna Soubry pulling her amendment at the last minute.

Amendments selected by House of Commons speaker John Bercow on 14^th February 2019 and results

Not for turning

None of tonight’s proceedings offer much encouragement to Theresa May, but there’s little doubt she will continue to pursue changes to the exit agreement as planned, particularly the Northern Ireland backstop. In turn, senior EU officials have kept up the mantra that the insurance policy is necessary and non-negotiable. The bloc continues to be open to make presentational changes to the deal to make more palatable to Parliament. This vicious circle shows all signs of continuing almost till the last minute before Brexit.

Welcome back vol.

Those 44 days remaining before Brexit, and diminishing, are rekindling implied volatility, on the back of deepening Brexit fog. The size of whipsaws projected in both short and long-term options trades are increasing for the first time in around a month. This suggests more investors are becoming jittery enough again to hedge and that speculators are being tempted back by potential fast price moves. Put another way, optimism that the pound could stabilise above $1.30 continues to ebb after it tumbled off a top of $1.32 late last month. The pound has also begun to react more negatively to weakening growth data, pointing to an evaporation of underlying confidence in the economy’s resilience.

Thoughts on sterling/U.S. dollar price chart

The rate and gradient at which cable has relinquished January’s gains—falling about 3.5% since 25^th January—to trade below long and short-term averages was already creating tough hurdles for a rebound regardless of tonight’s outcome. At last look, with sterling still struggling around $1.28 handle, the nearest likely focus point on the downside could be a region of consolidation earlier in the month with a base at $1.27. But failure to quickly recapture corroborated support that is now resistance at $1.2865 would suggest sellers retain the whip hand. Kick back lows from December around $1.26 could then come back into play.