The downtrodden pound could be a big winner from the UK's Brexit chaos, but investors are expecting a bumpy ride

Alex McBride/Getty Images
  • The pound looks set to rally in the chaotic aftermath of Prime Minister Theresa May’s historic Brexit vote defeat.
  • May’s defeat makes the following more likely: a no-deal Brexit, a second referendum, or Britain never leaving the EU at all. That latter two would be a godsend for pound bulls.
  • Traders also expect major bouts of volatility going forward, as uncertainty dominates the newsflow.
  • Follow the pound’s movements live at Markets Insider.

In the hours before British Prime Minister Theresa May’s biggest ever defeat in the House of Commons on Tuesday evening, the pound was down as much as 1.5% against the dollar. But after the vote, it jumped, eventually ending up in positive territory on the day.

May’s rejection by more than two thirds of lawmakers, including more than 100 from her own party, threw Britain’s exit from the European Union into disarray. Such uncertainty in British politics should be terrible news for the British pound, a currency which has endured more than two years of speculation and hearsay.

But the vote makes the following more likely: a no-deal Brexit, a second referendum, or Britain never leaving the EU at all. That latter two would be a godsend for pound bulls, and is why, following on from Tuesday’s jump, currency analysts say that the pound could continue its rally.

“The FX market has found a silver-lining and sterling has strengthened,” Petr Krpata, currency analyst at ING wrote on Wednesday morning.

“This is likely a function of … increased likelihood that Prime Minister Theresa May is likely to have to (eventually) seek cross-party support for the next deal, with the perceived odds of Article 50 extension rising.”

Krpata goes on to argue that once the Brexit outcome is sorted, unless Britain ends up with no deal, the pound could rally sharply, owing to it being the most undervalued of all the major currencies.

“We see material upside to the heavily undervalued GBP (the cheapest in the G10 FX space) by year-end, as by then we expect a market-friendly resolution of the Brexit stalemate,” he wrote.

Richard Falkenhäll, senior FX strategist at Swedish bank SEB echoed Krpata’s sentiments in an email sent prior to the vote on Tuesday evening, saying that any development which increases market perceptions that the UK could stay in the EU will boost the pound.

“From a GBP perspective, any alternative going forward that increases the likelihood that the UK in fact stays a member of the EU, like a referendum on the government agreement or even a new election demanding an extension of the withdrawal period, is therefore likely to be supportive for the GBP,” he wrote.

“Although uncertainty is bad for the economy and bad for financial markets, in this case uncertainty may in fact be a positive factor for the British currency as it increases the likelihood the UK will remain an EU-member.”

Whatever happens, expect volatility

Screenshot 2019 01 16 at 10.26.30Markets InsiderThe pound was all over the place on Tuesday.

But one thing seems certain in the eyes of most in the currency markets: volatility.

“Uncertainty will stay high and UK markets volatile,” Dean Turner, UK Economist at UBS Global Wealth Management said.

“The continued absence of clarity is likely to lead to further volatility in the near term,” Suresh Tantia, investment strategist at Credit Suisse added.

The pound on Wednesday was mainly flat, trading higher by less than 0.1%. Overnight, the CBOE BPVIX, an index which measures volatility in the pound dollar exchange rate, dropped around 5% from its Tuesday peak.

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