GBP drops to 18-month low as May looks set to pull key vote

Summary:

• Unconfirmed reports that UK PM May will pull key vote on Brexit deal

• Pound dropping lower across the board in response

• GBPUSD drops to 18-month low just above $1.26

The pound has dropped to its lowest level of the year below $1.2660 in recent trade after reports that PM May’s key Brexit vote has been pulled. The move may have spared an embarrassing parliamentary defeat for the PM but it will no doubt see those calls for her to be replaced grow ever more vociferous. The negative reaction in the markets is more likely due to what it means for her position rather than the failure to win the vote - with even her staunchest supporters already highly skeptical as to whether the bill would pass - as it now seems increasingly likely that a long-touted leadership challenge will ensue.

The pound is depreciating against all of its peers today with the largest declines seen against the antipodean currencies. Source: xStation

May is now expected to make a late dash to Brussels in a frantic bid to renegotiate the deal but here position is no doubt becoming increasingly untenable. The frontrunners to replace May as PM such as Boris and Rees-Mogg are much more likely to push for a hard Brexit and this would no doubt be negative for the pound, at least in the near term.

The GBPUSD pair has made a break lower after taking out 1.2660. This is now a potential resistance level and if price fails to get back above here then further declines may lie ahead. Source: xStation

On the other hand, the pulling of the bill could actually be seen as not that negative for sterling once the initial downside has played out. May is now likely to try to renegotiate a better deal with the EU, with some guarantee on the length of time and also the UK’s ability to end the backstop agreement without EU approval where she will try to gain ground. The EU have said several times that they are unwilling to cede anything further and if May fails to make tangible progress then it seem unlikely she can remain in the role. While it increases the chances of May being replaced by a PM who is more in favour of a hard Brexit it does also raise the chance of 2nd referendum - had May’s deal passed, against all the odds, then Brexit would’ve been final.

If May is replaced then her successor will likely find the odds equally, or if not more, heavily stacked against him. This leads to another important development of late, with the ECJ ruling this morning that the UK can unilaterally withdraw Article 50. In essence this means that a “no-deal” Brexit is no longer the default case come the end of March 2019 as MPs would have to vote in favour of this happening - something which is unlikely to pass through parliament. This all leads to a greater chance of a people’s vote or 2nd referendum on Brexit, which while the chances of it occurring still seem improbable are certainly rising and should it deliver a remain verdict then the pound would rally sharply.    

A longer term chart reveals possible support at 1.2590 but traders should be aware that the market remains in a clear downtrend and any attempt to buy here would be going against the prevailing trend. Source: xStation

There’s still no official confirmation on this with the latest reports indicate that the PM is set to make a statement to commons later this afternoon (3:30PM) title “exiting the European Union”.