In an historic defeat for the UK government, the Prime Minister’s Brexit deal was rejected by a margin of 432 to 202 on 15 January 2019. Bethany Payne, Portfolio Manager, Global Bonds, shares her thoughts on the outcome of the vote.

The pound strengthened as UK Prime Minister Theresa May’s Brexit deal was rejected in an historic defeat in Parliament on Tuesday, January 15. The scale of the defeat, which is in line with commentators’ worst expectations, increases the pressure on Theresa May to find a compromise that could garner cross party support.

The EU27 will probably not concede anything more as it is not clear what could gain approval in the House of Commons. It is instead more likely that, at this stage, compromises are reached in-house leading to a ’softer’ Brexit, or greater concessions to the Labour party over protection of workers’ rights and environmental standards.

Conservatives will now have to try to find equilibrium between softening the deal and maintaining the fragile truce within Cabinet.

Sterling rallied further shortly after the result of the vote on Tuesday evening, when the leader of the Labour Party, Jeremy Corbyn, called a vote of ‘no confidence’ in the government. Theresa May is widely expected to survive this with the support of the Democratic Unionist Party (DUP) of Northern Ireland.

This increases the probability that the Labour Party pivots towards supporting a second referendum, which will be seen as positive for the UK as it increases the chances of ‘no Brexit’. However, any hopes may soon be discounted as amendments to Theresa May’s motion on Monday may stipulate indicative votes on alternatives to the deal, which is likely to confirm that there is no majority yet for a second referendum in Parliament.

While near-term developments may look supportive of a softer deal and compromise in the following days, it is hard to see a straight path to a final deal. Any near-term optimism and strength in the pound may not be maintained until the political risk premium is removed. What is clear is that it is highly likely that Article 50 will be delayed, to allow a grace period for the UK to be able to pass the necessary legislation that prevents it crashing out without a deal.