Pound Hits 18-Month High As May Opens Door To Brexit Delay

Update: Cable retraced some of its gains after May told Parliament that she would hold a series of votes on her 'Plan B' Brexit deal, a measure to take 'no deal' off the table, and possibly a third vote on whether to ask for an extension of Article 50 if the vote on "Plan B" fails (which it almost certainly will). While her comments largely confirmed earlier reports about what appear to be major concessions to her critics, she offered some reluctance to do away with 'no deal' entirely, though she did say the UK wouldn't leave without a deal without the explicit consent of Parliament.

The votes would be held as follows: March 12 would be vote on "Plan B", if that fails, motion would be tabled for amendment vote on March 13 on whether Commons would support leaving without a deal; if that fails, amendment vote on extending Brexit deadline would be tabled on March 14.

May insisted that any delay must be "short and limited" to prevent the UK from needing to participate in EU parliamentary elections. Though she warned that a delay would ultimately lead to a "sharper cliff."

Despite these concessions, some of May's critics accused her of cynically trying to bully MPs into accepting her deal.

But even if this is a political gambit to try and drum up support for her deal, it appears it could all still blow up in her face if Parliament votes against 'no deal' exit but also votes against an extension.

* * *

Prime Minister Theresa May has finally offered some assurances that, after two years of stubbornly adhering to her negotiating strategy, she might be on the cusp of capitulating to her critics in the cabinet and House of Commons. And the pound is loving it.

The British currency rallied on Tuesday to its strongest level against the euro since June 2017 after Labour leader Jeremy Corbyn said Monday that he would begrudgingly table an amendment calling for a second referendum, while May promised to consult her cabinet about the possibility of asking EU27 for a 'Brexit Day' delay.

On Tuesday, testimony by BoE Governor Mark Carney helped compound the pound's rally, helping to push the battered British currency higher for a third straight day. Offering some reassurances to the market, Carney said during testimony to the Treasury Select Committee on the BoE's most recent inflation report that he hasn't seen any liquidity strains in the market, and that the UK's economic fundamentals are sound (which is a serious departure from the "Project Fear" rhetoric of imminent economic collapse following a 'no deal' exit that he has employed in the not-too-distant past). He also affirmed that price growth will likely continue above the central bank's target, offering a further boost to the pound.

Adding to the case for optimism, the Times of London and the BBC reported Tuesday morning that May would commit to holding votes on whether to scrap a "no deal" exit and authorize her to ask for an extension of Brexit Day.

May confirmed these reports during her speech to Parliament Tuesday following her cabinet meeting, though she affirmed that the UK would "make a success of no deal, if we have to," suggesting some reluctance about taking that option off the table. She promised that the UK would only leave without a deal "with the explicit consent" of Parliament. She also affirmed that a third vote would be held following the 'no deal' vote about a Brexit Day extension. Meaningful vote would be on March 12, 'no deal' vote on March 13, and 'extension vote' would be March 14.

The news offered additional succor to the pound ahead of an expected update to Parliament following Tuesday morning's cabinet meeting...

EURGBP

...and against the dollar, the pound climbed to fresh YTD highs.

GBPUSD

Looking ahead, analysts will likely focus on whether a delay of Brexit has already been priced into the pound, and if so, by how much? RBC strategist Adam Cole told BBG that he believes the market has anticipated a delay, while Nomura International Plc strategist Jordan Rochester said the bank had been hearing from clients that the long-term money won't buy back in until a deal is done.