Pound Faces Rocky Road as May's Brexit Tussles Far From Over

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Currency strategists see a rough stretch ahead for the pound, even after U.K. Prime Minister Theresa May survived a bid to oust her as she seeks to rally support for her Brexit deal.

Sterling gained the most in more than a month in the run-up to Wednesday’s vote, but failed to build upon that strength after Conservative Party lawmakers voted 200 to 117 to keep May as party leader.

Pound Faces Rocky Road as May's Brexit Tussles Far From Over

Given the number of votes that went against her, and the uncertainty ahead -- May still faces the daunting task of getting her Brexit plan past Parliament -- the pound’s next move is likely to be lower, according to Columbia Threadneedle Investments.

“It failed to rally on the news,” said Ed Al-Hussainy, senior currencies and rates analyst at the money manager. “When you see a dynamic like that, it means the good news is priced in. We don’t have another slug of good news, so I think that means that some people will just take profit.”

Pound Faces Rocky Road as May's Brexit Tussles Far From Over

Sterling jumped as much as 1.5 percent in New York trading Wednesday to $1.2672. While it remains close to that, it’s also within range of the 20-month low of $1.2478 touched earlier in the session.

Given market positioning, “there’s a lot of room for the market to come in and start to establish shorts on this,” said Greg Anderson, global head of foreign-exchange strategy at BMO. He has a target of $1.23 before early March.

Margin Counts

While Wednesday’s outcome means that May can’t be challenged within her party for another year, the limited margin of victory may be sapping sterling gains, according to TD Securities.

“It’s hard to get too excited just yet, as the margin of victory was moderate,” foreign-exchange strategist Mazen Issa said. The vote “helps to avoid a very bad outcome, which could easily push the U.K. government further into the realm of chaos. In the short-term, the pound will remain a chop-fest,” Issa said.

Wednesday may amount to a temporary reprieve for the embattled premier. She faces hardened opposition in Parliament to the Brexit agreement she negotiated with the European Union, and her attempts to get better terms have fallen flat. If May cannot get her exit terms through Parliament, the U.K. will be on course for a no-deal Brexit, risking economic and political upheaval. The idea of a second referendum has also been mooted by some.

With the narrow victory, Wells Fargo’s Erik Nelson sees May facing an “even rockier road” than had been expected getting to a possible deal on Brexit. Still, he sees potential for a light at the end of the tunnel for pound bulls as the U.K.’s exit day from the EU on March 29 approaches.

“As the March deadline moves closer for Britain to leave the European Union and urgency builds up, Parliament may have no choice but to vote a deal through, with the alternative being a no-deal Brexit which I don’t think anyone wants,” Nelson said.

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