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Pound Settles after Brexit Vote Defeat; Dollar Edges Lower

1/17/2019, 2:54:56 PMTrading Strategies
Pound Settles after Brexit Vote Defeat; Dollar Edges Lower

The pound firmed up on Wednesday following a plunge overnight when the UK parliament overwhelmingly voted down Prime Minister Theresa May's Brexit deal, adding to uncertainties surrounding the UK’s withdrawal from the European Union.

GBP/USD was at 1.2862 by 03:54 AM ET (08:54 AM GMT) after falling as low as 1.2667 late Tuesday.

The parliament on Tuesday voted 432-202 against May's deal, the worst parliamentary defeat for a government in recent British history.

Sterling had sunk more than 1% against the dollar in the wake of the vote, before rebounding as the sizable defeat for May was seen forcing Britain to pursue different options. Those options could still lead to radically different outcomes, ranging from another referendum that ultimately cancels Brexit to political upheaval that leads to a disorderly one.

"While the margin of May's loss was a surprise, the defeat itself was something the market had been pricing in for a long time and it appears that participants covered shorts in the pound after the vote," said Yukio Ishizuki, senior currency strategist at Daiwa Securities.

"The market is now factoring in the March Brexit deadline being extended. In the longer run it may boil down to two scenarios - a no-deal Brexit or no Brexit at all."

The deadline for Brexit is March 29, but with the clock ticking down quickly, it now appears more likely that the U.K. will seek an extension of the deadline.

Sterling was little changed against the euro, with EUR/GBP at 0.8874.

The single currency was holding steady against the U.S. currency, with EUR/USD changing hands at 1.1419.

The yen, typically sought by investors as a safe haven during times of economic or market stress, was a touch higher against the dollar, with USD/JPY dipping 0.12% to 108.53.

The U.S. dollar index, which measures the greenback’s strength against a basket of six major currencies, was down 0.18% to 95.50.

The greenback remained on the back foot after U.S. Trade Representative Robert Lighthizer that he did not see any progress made on structural issues during U.S. talks with China last week.

Investors "are mainly focused on the outcome of the U.S.-China trade negotiations, but it may take more than a month before it will become clear," said Ayako Sera, market strategist at Sumitomo Mitsui Trust Bank.

"It's hard for market sentiment to turn one way or the other, whether a recovery or decline, as long as it remains unclear what outcome there will be."

The dollar was also pressured by diminishing expectations the Federal Reserve will continue raising rates this year due to weakness in global growth.

Kansas City Fed President Esther George on Tuesday made the case for patience and caution on interest rate hikes to avoid choking off growth.

Her comments echoed those of Dallas Fed head Robert Kaplan, who said Tuesday the U.S. central bank has the luxury to wait before raising interest rates again, and should take advantage of it.

Kaplan and George are the latest Fed officials to join a growing consensus to leave rates on hold until a varied set of economic risks resolve.