Pound stands firm after Theresa May's Brexit deal voted down by a crushing margin; PM's defeat factored in by market

The pound edged down Wednesday after the record defeat of British Prime Minister Theresa May’s Brexit plan but mostly held its ground as investors consider the next likely developments in the long-running saga.

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

The sterling tanked to a near two-year low soon after the government’s proposal on leaving the European Union was soundly beaten Tuesday evening, but it soon bounced back as traders bet there would not be a “no-deal” exit.

And while it was slightly lower in Asia, the pound managed to avoid the sort of pummelling many had predicted, and analysts say the positive news is that the options for the future are narrowing.

With May expected to win a vote of no confidence called by the opposition Labour Party on Wednesday, the talk will move to what happens next.

Analysts say May could ask to delay Britain’s 29 March exit from the bloc as she looks for a more palatable agreement from her EU peers, while there is growing speculation of a general election and even another referendum.

“Momentum is shifting away from the harder Brexit route and towards a number of options ranging from postponement and second referendum. That is pound supportive,” said Gavin Friend at National Australia Bank.

But he added: “I don’t see the pound rallying much until markets are sure the (ruling) Conservatives have seen off the confidence motion.”

Meanwhile, London may still leave the bloc without a backup.

“We cannot ignore the fact that it takes very little effort for no-deal, whilst it takes a vast amount of effort to avoid it,” warned Neil Wilson, chief market analyst at Markets.com.

Asian equity markets mostly rose after Tuesday’s rally that was fuelled by Chinese plans to cut taxes in a bid to support the stuttering economy.

However, traders are growing increasingly worried about the lack of movement in the US over the government shutdown, which is now in its fourth week, with both sides digging their heels in.

Tokyo ended off 0.6 percent, but Hong Kong rose 0.2 percent to build on Tuesday’s two percent rally while Shanghai was flat.

Sydney and Seoul each rose 0.4 percent, while Singapore added 0.3 percent and Wellington put on 0.7 percent with Mumbai 0.2 percent higher.

Investors are now gearing up for the start of the corporate earnings season and some are concerned that the effects of recent soft economic data globally – as well as the China-US trade war – will begin to show up in accounts.

“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.”

Against the euro, the pound was little changed at 88.65 pence after gaining about 0.4 percent overnight.

The euro was steady at $1.1411 following a loss of 0.5 percent the previous day.

The dollar was flat at 108.655 yen after advancing 0.5 percent against its Japanese peer overnight amid a further ebb in risk aversion with U.S. stocks posting strong gains.

The Swiss franc, which tends to gain in times of political tensions and market turmoil along with the yen, also sagged.

The franc lost 0.7 percent against the US currency and last held steady at 0.9878 franc per dollar.

The Australian dollar was slightly lower at $0.7199 after dipping 0.2 percent on Tuesday.

With inputs from agencies

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