Sterling moved over 100 pips last night after the parliament's decision. Theresa May has until February 13th to come back with a better deal
We do not care if we are hit by Armageddon, this was the message from the U.K.’s Parliament last night. One of the most dangerous scenarios, a no-deal Brexit scenario is still alive and as a result of this traders sold off the British Pound. The currency which crossed above the 1.32 mark against the dollar in the last few days, dropped like a rock. There was nearly a 100 pip move (it fell from 1.3167 to 1.3055) last night on the back of the parliament's decision.
The overnight volatility for sterling also jumped.
Theresa May begged MPs to vote against her Brexit deal, a deal which she stitched together in more than 18 months. May asked the parliament to support her by not choosing the option of delaying the Brexit. The prime minister assured them that she will renegotiate the most contentious part of the deal- the Irish backstop. It is under these hopes that the MPs decided to back her this time. She has promised to bring a new deal back to the parliament by February 13 and they are ready to ship her to Brussels to achieve this.
For investors, this is no short of disaster because the EU has already made it clear to her that they are in no mood of negotiating this part of the deal. Theresa May had a reality test of her deal and suffered a historic loss in the parliament on January 15, the EU made it clear "they are not open renegotiations" and this opens the door wide open for economic chaos for both parties.
Having said this, Donald Tusk, EU president has indicated that non-binding declaration on future relations could be up for debate but for that to happen, the prime minister needs to be mindful of moving her red lines. These red lines are defined in two ways; free movement of labour or be part of the EU's customs union.
This saga of renegotiation of the deal has created a lot of uncertainty and the fact is that there is more to come to. Firstly, she needs to discuss and convenience the EU that this is the only deal that they have now and then with the amendments made, she needs to put this back in front of the parliament and wait for their approval. This will be in the shape of another vote taking place. It isn't going to be easy especially when her own party is already divided and many aren’t ready to throw their full weight behind her vision.
The fact is that for businesses, governments are going round in circles and there is no immediate solution on the horizon which can make them comfortable in making the most important choices for their businesses. There is still so much to do and the clock is ticking, both EU and UK parliaments have their own red lines defined and no one is ready to move them and this will result in the UK tumbling out of the EU.
The outcome of that scenario would be highly devastating for the British people who will face a currency which is highly likely to lose another 20% of its value, a serious risk of recession, house prices could be crushed. The reality is that certain companies have already decided to leave the UK and some are pilling stocks of medicine and manufacturing components just to keep up with the demand in the time being.
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