Uncertainty Rises In The UK- More Volatility Ahead In The British Pound

Uncertainty Rises In The UK- More Volatility Ahead In The British Pound
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Divorce can be a messy business with many consequences, ask Jeff Bezos, the founder of Amazon and richest man in the world these days. His divorce will change his position in the world as his wealth is about to be half what it was had he remained with his wife. Divorce is not just about money and possessions; it can have more than a few consequences for families. Divorces rarely happen overnight; it can take years for the parties to settle on the terms. While the tabloids are rife with details of the Bezos divorce, perhaps the most high-profile separation these days is not the split of a married couple.

The citizens of the United Kingdom voted to divorce from the European Union in June 2016. The referendum was the first step that led to over two and one-half years of negotiations between the UK and EU. The two immediate consequences of Brexit were that the value of the pound against the dollar tanked, and the UK Prime Minister’s resignation as David Cameron handed the government over to Theresa May. Prime Minister May has had the thankless job of executing the will of the British people and negotiating the terms of the divorce with the leadership of the European Union.

While the EU approved Prime Minister Theresa May’s proposal, there has been more than a little pushback in the halls of Parliament. The market had expected the plan to fail when it came to the floor of the Parliament for a vote and were not disappointed when it went down in flames by an overwhelming margin of 432 to 202 on Tuesday, January 15. On Wednesday, January 16, Prime Minister May and the government she leads will face a confidence vote in Parliament which follows Tuesday’s crushing defeat. In her speech following the no-vote on Brexit, the Prime Minister told her fellow MPs that there is “no clarity” when it comes to Brexit. 

Source: CQG

The pound tanked following the Brexit vote in 2016 moving from $1.50 to $1.20 against the dollar. However, as it became apparent the Prime Minister’s proposal was going nowhere fast, as the weekly chart highlights, the pound has moved higher for five consecutive weeks. On Tuesday, the kneejerk reaction in the pound-dollar relationship was to move lower, but it quickly rebounded and closed near the highs of the session at over the $1.29 level. The action in the pound suggests that Brexit is bearish for the currency and another route could boost the value of the British currency.

There are at least three possibilities when it comes to Brexit. The Parliament can vote for another referendum which could potentially keep the UK within the EU. The second option is that if the EU and UK cannot reach a deal that Parliament supports, the March 29 deadline may come and go which will automatically end the UK’s membership in the Union with a host of unpleasant consequences for both the EU and the UK. The third and the most likely outcome is that the two sides could agree to stop the clock which would kick the can down the road, perhaps indefinitely. Any or all of these potential outcomes and the possibility of a new government in the UK after Wednesday’s confidence vote in the Tory Party and Prime Minister May’s continued role as the leader could cause increased volatility in the pound-dollar relationship. The pound is ground zero for volatility in the foreign exchange markets these days, and that is likely to continue until there is some degree of clarity over Brexit one way or another. 

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