espite the threat of a no confidence vote, Sterling held its own as trading opened yesterday, an indicator of just how little chance the market gave the motion of passing. The currency then rallied throughout the day as it became clear that the Prime Minister would have more than enough support required in order to achieve a majority backing from her peers. This result was confirmed just before 9pm on Wednesday evening, with 200 of the 317 Tory MPs voting in favour of May remaining at the helm of the Conservative Party.

With May’s victory heavily priced in prior to the outcome of the vote itself, Sterling actually sold-off modestly as the vote was announced, possibly due to some investors anticipating a slightly larger margin of victory. That being said, the victory itself was pretty comfortable and while losing more than one-third of her party’s backing is a blow, May will now be unchallenged as leader for at least the next twelve months.

The outcome of the vote removes a potentially very significant downside risk to Sterling, given its potential impact on Brexit. May will now return to Brussels today to seek additional reassurances that the Irish border ‘backstop’ will not be in place indefinitely. Whether that will be enough to sway MPs to back her deal remains to be seen.

Draghi set to confirm QE end this afternoon

The Euro traded within a relatively narrow band this morning, with investors in a fairly cautious mood ahead of this afternoon’s European Central Bank monetary policy announcement.

As we mentioned earlier in the week, we think that Draghi will confirm the bank’s QE programme is set to end this month, although he is likely to take on a more dovish tone of communications given the recent disappointments in economic data. We think that downward revisions to the ECB’s growth and inflation forecasts cannot be ruled out.

Earlier on Wednesday, the latest US inflation data came in bang in line with expectations, showing that consumer price growth was flat month-on-month in November. With inflationary pressures easing in the US, it is now looking likely that the Federal Reserve will pause its hiking cycle in 2019.