The sterling edged higher on Wednesday after UK Prime Minister Theresa May’s Brexit deal received a sound defeat.
The British currency gained 0.02 percent to $1.2860 against the dollar, having quickly recovered from its brief fall to $1.2670 on Tuesday right after May’s Brexit arrangement was voted down by a hefty margin to mark as the biggest defeat for sitting government in history.
Senior currency strategist Yukio Ishizuki said while the margin of May’s loss was a surprise, the defeat itself was something the market had been pricing in for a long time and it appears that participants covered shorts in pound after the vote.
The House of Commons voted 432 versus 202 to reject the deal, a higher number than the figures estimated before the vote.
May now faces a confidence vote later in the day and British opposition Labor Party leader Jeremy Corbyn has called a vote a no confidence in her government.
The UK is still set to leave on March 29 but the defeat sets the manner of that departure aside, and the timing of it, into further uncertainty.
The market is now factoring in the March Brexit deadline being extended, Ishizuki stated, adding that in the longer run it may down to two scenarios – a no-deal Brexit or no Brexit at all.
Various media reported that some traders now see the outcome could either hinder UK’s withdrawal or result in another referendum that could end up cancelling Brexit. Still, several investors expect May to work on the postponement of the planned March 29 exit date.
Looming Brexit Risks to Drag the British Pound
Despite the sterling’s display of resilience, a number of experts cautioned that the currency could struggle in the coming months due to the remaining doubts over the UK’s manner of withdrawal from the European Union (EU).
Strategist Patrick Bennett stated that they think there are still a lot of risks out there, and while the defeat of May’s proposal takes away one of leg of uncertainty, they still have many others.
Bennett added that looking at the circumstances, a confidence vote that is coming up, potentially a second referendum, potentially a general election – none of those things are going to endear investors to the economy or to the currency at this level, so they think caution is still the best approach.
Major wealth managers have also recommended no to bet on or against the pound given those uncertainties.
A clearer picture of the Brexit situation may help the British currency determine a more definite direction, which could mean either the UK parliament coming to an agreement on the next step to take, or most of the British people supporting any proposal, Bennett said.
Until then, the sterling would likely remain subdued against major currencies.
The pound is seen trading more positively against the dollar over this year, but against other major currencies, the British currency is expected to stay and under-perform until those doubts fade.
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