GBP/USD: Pound Firm Ahead Of Vote of No Confidence

After falling steadily versus the dollar, the pound surged following the Brexit vote in Parliament. The pound dropped to a day’s low of US$1.2672 before jumping to a high of US$1.2917.

What do these figures mean?

When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.

For example, it could be written: 1 GBP = 1.28934 USD

Here, £1 is equivalent to approximately $1.29. This specifically measures the pound’s worth against the dollar. If the US dollar amount increases in this pairing, it’s positive for the pound.

Or, if you were looking at it the other way around: 1 USD = 0.77786 GBP

In this example, $1 is equivalent to approximately £0.78. This measures the US dollar’s worth versus the British pound. If the sterling number gets larger, it’s good news for the dollar.

As analysts had expected, Theresa May lost her Brexit vote in Parliament. The UK Prime Minister suffered a crushing defeat, which saw her lose by 230 votes. 432 voted in against the Brexit deal, whilst just 202 voted in favour. The scale of the defeat prompted opposition leader Jeremy Corbyn to table a vote of no confidence for tomorrow.

The pound rebounded off session lows as investors took an optimistic view. This defeat is being seen as a step towards extending Article 50, rather than the start of a no deal Brexit. The hope is that extending Article 50 could result in a better deal or even Brexit not ever actually happening.

Why is a “soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

Today Theresa May will face a vote of no confidence from the opposition. Analysts are expecting her to survive given that the DUP and other Tory rebels have guaranteed their support towards her.

So what next? On surviving a vote of no confidence, Theresa May has until 21st January to put forward her Plan B for Brexit.

Dollar Strength Unlikely To Last

The dollar traded broadly higher on Tuesday. However, this was mostly associated to euro weakness rather than any resounding dollar strength. The dollar trades inversely to the euro. Given the euro fell sharply on weak German GDP data, this boosted the US dollar.

Strength in the dollar is unlikely to remain given the increasingly dovish tone of the Fed. With Fed raising questions over the outlook of the US and global economy, investors and Fed officials themselves are doubting whether the central bank can hike rates as planned this year.

Adding to dollar woes, the US government shutdown continues. Data is not reaching the markets as it should which is muddying the picture for investors. Furthermore, the shutdown means that government employees are not being paid. This will not be doing any favours to the economy and could result in a softer quarter for economic growth.

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