Pound Gains for Fifth Day Against Euro as May Survives to Fight

(Bloomberg) -- The British pound advanced as U.K. Prime Minister Theresa May survived a vote of no confidence in her government by a narrow margin.

The U.K. currency was poised for a fifth day of gains against the euro and was up against the dollar in New York afternoon trading Wednesday. The moves came after May, as expected, won a vote in the House of Commons brought on amid a bruising battle over plans for Britain’s exit from the European Union. The final tally was 325 votes to 306.

Pound Gains for Fifth Day Against Euro as May Survives to Fight

Wednesday’s motion of no-confidence was brought forward by the opposition Labour Party after May’s Brexit deal was rejected by more than 200 votes on Tuesday in an historic loss. With May successfully seeing off the immediate threat to her government, she now has to turn her attention to plan B, which could involve bringing the divorce deal back to another vote. She invited rival parties to start talks following the Wednesday vote.

Upcoming political initiatives “are likely to lean in the softer Brexit direction, which will favor a buy pound on dips strategy,” said Alan Ruskin, chief international strategist at Deutsche Bank AG. “But for the pound to push significantly higher, we will need to see signs that Theresa May’s offer to also work with the opposition is gaining some traction.”

Sterling gained 0.1 percent against the dollar to around 1.2876 in Wednesday trading. The euro slid 0.3 percent against the pound to around 88.48 pence and was on course for its longest losing streak against sterling since October.

The U.K. currency has weakened about 14 percent against the greenback since the result of the June 2016 Brexit referendum, and analysts in a Bloomberg survey see scope for a rally to $1.34 if a divorce deal is finally agreed on.

Here’s a selection of analyst views:

Westpac

  • The outcome of the parliamentary votes helps to minimize the worst-case Brexit outcome risk for the pound, said Richard Franulovich, the firm’s head of currency strategy in New York
  • The currency market reaction to May’s survival was minimal because it was fairly clear beforehand that the premier had the numbers to win a confidence vote
  • “Now she has to forge along and cobble together a plan” that will win the backing of Parliament, “and that means seeking concession where possible” from the European Union

BNP Paribas

  • “Looking ahead we expect expectations for an extension of Article 50 to build, likely pre-conditioned on holding a second referendum,” said Parisha Saimbi, a rates strategist at BNP Paribas in London, referring to the treaty article that allows countries to quit the European Union, the associated March 29 deadline for Brexit negotiations and the prospect of another popular plebiscite on Brexit
  • “We expect this should provide support to the pound, and hence we continue to favor long pound positioning, funded via the Swiss franc”
  • BNP Paribas expects the pound to rise to $1.36 should a second referendum be announced

TD Securities

  • Sterling is going to be largely confined to the $1.28-$1.2930 range over the next several days, according to Mazen Issa, senior FX strategist at TD
  • Until there’s more clarity and the market is out of a wait-and-see moment, the pound would be “quite reluctant” to move otherwise, he said by phone
  • The fact that May is having discussions take place across party lines is a positive for the pound

Oanda

  • “Current expectations are that a no-deal Brexit is less likely and that we may see Article 50 eventually extended,” Ed Moya, chief market strategist at Oanda, wrote in a note

Commonwealth Bank of Australia

  • “We think it unlikely the EU will make any large concessions, but they now appear more willing than ever to bend on their strict ‘no negotiation’ stance,” Chief Currency Strategist Richard Grace wrote in a note to clients
  • “The option of a second referendum has now increased” and if such a vote were called, CBA believes the pound would begin to appreciate versus the dollar because YouGov polls indicate a majority leaning towards remaining in the EU

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