The pound initially fell on the back of the inevitable news that the UK Prime Minster was facing a vote of confidence this evening. However, Sterling then rebounded as several ministers came out and voiced their support for Theresa May. Still, the pound’s gains were limited as investors awaited the result of the votes, knowing full well the risks of a surprise defeat for the PM, which could delay the Brexit process even further. But the pound is unlikely to go anywhere fast because Brexit uncertainty won’t go away even if the PM wins the confidence vote tonight.
Mrs May’s support has been falling and apparently hit a new low this week after she abandoned a planned vote in the House of Commons on her Brexit plan. Fighting to get her deal through parliament, she decided to go and seek reassurances from EU leaders about the controversial backstop arrangement regarding Northern Ireland. But that trip had to be cut short and she has returned to the UK to fight for her job.
Mrs May needs to secure a majority of 158 votes, else she would have to stand down and a full Tory leadership contest will then commence. If Mrs May wins, she cannot be challenged for at least another year. However, it is also possible she could resign in the event she doesn’t win overwhelmingly.
While it looks unlikely that the Prime Minister will lose tonight, nothing surprises me anymore when it comes to UK politics. But one thing is clear: if Mrs May loses, Brexit will have to delayed - whoever the next PM might be, he or she will have to apply for an extension to Article 50 and push back the official exit date of 29th March. Indeed, it could take at least a month before a new PM is chosen.
Even if Mrs May survives the confidence vote, it does not necessarily mean MPs will eventually back her Brexit plan despite any reassurances - written or otherwise - she might get from Brussels. So, make no mistake about it, uncertainty is here to stay well into the new year and for that reason, I can’t see the pound stage a meaningful rally anytime soon. Any potential short-term gains will be driven mainly by short-covering and therefore unlikely to last.
Among the GBP crosses that we haven’t looked at much recently is the GBP/JPY. Given the lower low and lower highs, this pair looks poised to potentially drop to a new yearly low below the psychological level of 140.00 in the days ahead. It faces key short-term resistance around the 142.75-143.20 range. But IF the GBP/JPY manages to break above this resistance zone decisively then it may stage a rally towards the 200-day moving average around 146.15 next.
Source: TradingView and FOREX.com.