Why the pound collapsed

The British currency continues to show increased volatility. During the day, the pound/dollar pair tested the middle of the 28th figure, rising by a hundred points during the European session. However, in the evening, the pound collapsed again - to the annual low.

It is obvious that the reasons for this price fluctuation are somehow connected with Brexit. Over the past two years, absolutely all the more or less significant movements of the pair are due to the prospects of the "divorce process". And today's volatility is no exception.


But let's start with a short background story. Earlier this week, a scandal broke out in the British Parliament: Labour demanded to provide them with closed government documents that contain expert legal assessments of the Brexit deal approved by ministers and the EU. According to the deputies, they need to know the legal consequences of the transaction, as on December 11, they will decide the fate of the agreement. The deputies voiced these demands in an ultimatum: if Theresa May does not fulfill them, they threatened an open confrontation between the government and parliament. According to the leader of the Labour Party, his colleagues asked for this pact of documents a few weeks ago, but members of the government (of course, with May's knowledge) ignored them.

The deputies regarded such behavior of the prime minister as an obstacle to the work of the House of Commons. However, such accusations are often heard within the walls of the British Parliament, but the words usually do not go further. Yesterday, parliamentarians threatened to start a rather long procedure of proceedings - but the market ignored this fact. Too often, Labour and some conservatives have tried to take action against the government over the past year, but in the end have not found the necessary support among colleagues.

Therefore, today's vote to investigate the issue of disrespect of the Cabinet to the legislature shocked the markets. 311 deputies supported this initiative, while only 293 were against it. Moreover, parliamentarians even rejected the proposed amendment of the government, which would delay the process of investigation (members of the Cabinet proposed to first refer this issue to the Committee on the privileges of the Lower House). Now, a specially created Committee will conduct an audit, following which parliamentarians will decide on the application of disciplinary sanctions against the perpetrators, if any, will be established during the investigation. I note that disciplinary measures include dismissal, so violators can end up paying for their posts.

But the consequences of the investigation are a secondary concern in the context of the upcoming events. Today's vote clearly demonstrated the fact that Theresa May does not have the support necessary to approve the deal. The key vote will take place next week, December 11, so the prime minister has not much time to reorient doubting deputies. Traders reacted anxiously to the fact that Theresa May's government does not have the necessary majority in the House of Commons, and hence the failure of the key vote, and the vote of no confidence – all these scenarios can really be realized soon.


In other words, Theresa May failed an important exam on the eve of the parliamentary debate on the draft deal (they begin tomorrow, December 5) and on the eve of the historic vote for this draft. Now doubts about the implementation of a "soft" Brexit will only increase, which means that the pound will be under even greater pressure. And not only the pound: today's events in the British Parliament influenced the general mood of traders throughout the market. The yen rose against the background of flight from risks, the euro fell after the sterling, and the dollar index made up for its losses associated with a decrease in the yield of 10-year treasuries.

In addition, the US currency received an impetus for its growth after the "hawkish" comments of the head of the Federal Reserve Bank of New York, John Williams. Today, he said that the US economy is "stronger than ever": in his opinion, inflation will exceed the two-percent target, and the labor market will continue to strengthen. And although he said that the Fed will in any case make decisions based on the incoming data, Williams still expressed optimism about the prospects of monetary policy. Here it is worth noting that Williams, as a rule, takes a cautious position, so today his comments surprised the market, provoking the growth of the dollar.

In summary, it should be noted that the pound will be subject to such price fluctuations until the Brexit vote. Therefore, trading the pound in any of the currency pairs is quite dangerous: its behavior will be unpredictable in the near future.

The material has been provided by InstaForex Company - www.instaforex.com