The pound closed higher versus the dollar on Wednesday after Theresa May survived the vote of no confidence in Parliament. The pound spiked to a high of US$1.2898 before paring some gains to close at $1.2887.
Theresa May survived the no confidence motion in Parliament winning by 325 votes to 306 votes. The motion was tabled by the opposition leader Jeremy Corbyn following Theresa May’s crushing Brexit defeat earlier in the week. This no confidence vote was a much closer race than what market participants had been expecting. However, a win is a win and Theresa May will remain as Prime Minister.
The pound spiked higher following the result. This is a reflection of the stability that keeping Theresa May as Prime Minister brings, particularly given the Brexit uncertainties.
|How does political stability boost a currency?|
|Political stability boosts both consumer and business confidence, which means corporations and regular households alike are more likely to spend money. The increased spending, in turn, then boosts the economy. Foreign investors prefer to invest their money in politically stable countries as well as those with strong economies. For foreign investors to put their money into an economy, they need local currency. As they acquire the money needed, the demand for that particular currency increases, which then boosts its value.|
Now investors will switch their full attention towards Theresa May’s Plan B. Theresa May now has until 21st January to present her plan B. This could include renegotiating, extending article 50, putting the vote to Parliament a second time, a second referendum or a no deal Brexit.
Any steps away from a no deal Brexit could support the pound. This is because a no deal, hard Brexit would be detrimental to businesses and consumer confidence. It would therefore negatively impact the UK economy and the pound.
|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.|
The dollar broadly higher on Wednesday. However, this was more thanks to euro weakness than any dollar strength story. With the US government still on shutdown, the markets are not receiving any of the economic data which is needed to assess the economy.
With little in the way of data from the US, the dollar looked towards the euro. The dollar trades inversely to the euro. Concerns over the health of the eurozone economy following another week of soft economic readings sent the euro lower. This boosted the dollar.
Today, the government shutdown continues. Some data such as housing starts, and initial jobless claims will be released. Investors are likely to watch these more closely than usual given the lack of anything else to go on.
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