Daily Outlook

FxPro: U.K. parliamentarians deliberately cornered themselves

The British pound, as expected, experienced a high volatility day on Tuesday. As the result, however, the currency avoided serious pressure, ending Tuesday’s near levels at the opening. During the day on Tuesday, the pressure on the pound increased, sending GBPUSD from 1.2850 to 1.2700.

The deafening victory of the opponents of the current Brexit plan, with 230 votes on their side initially lowered the pound to 1.2670, but soon course makes U-turn and was replaced by decisive purchases. Earlier growing pressure, in fact, has exhausted the potential for further negative reaction.

The British government is deliberately moving itself into a corner. There is a suspicion that this is the real aim of the parliament, because the majority of legislators did not want Brexit, but only carried out the will of the people. The goal of some parliamentarians in this case may be to delay the process of approval of the plan.

Parliament clearly votes against Theresa May’s government plan but at the same time supports the government. We saw this in December, and the chances are high that May will retain the post of leader of the country during no-confidence vote today. It turns out that the legislators are not satisfied only with the actions of the government, but they are not against the current composition of the cabinet of ministers.

Markets consider May’s yesterday’s defeat as an increase in the chances of a second referendum. This would become very good news for the pound, which can push it to a long rally in the hope that now there will be more supporters of the status quo. There is a possibility of further rally to the region significantly higher than 1.30 with the growth potential to the area of 1.42.

On the other hand, we must not forget about the higher chances of an unorganized withdrawal of Britain from the EU. Since the discussion does not go smoothly and the final decision is constantly being delayed, the UK business increasingly fears such an outcome, but markets are not. And this event has the potential to send a pound far below the previous lows, not only under the 1.25 level, but also under 1.20.

At the moment, we can say with confidence that the pound has to go through many more bursts of volatility, and the further trend has not yet been fully determined. The current cautious purchases should not be misleading, since this is only a small respite before an almost inevitable serious shake.

Alexander Kuptsikevich, the FxPro analyst

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