|

Brexit: Five outcomes and GBP/USD reactions as a deal may become real

  • EU leaders convene in Brussels and aim to hammer out a Brexit deal.
  • The outcome depends on the instant reactions and not only on the deal.
  • Five different scenarios could send GBP/USD to considerably different prices.

"Get Brexit done" was the Conservative Party's conference slogan – but it is easier said than done. To make it happen, Prime Minister Boris Johnson needs to find a formula that both the EU and parliament agree on. The EU Summit on October 17-18 may also see other results, ranging from a short extension to a total collapse in talks.

At the time of writing, unconfirmed reports suggest a Brexit deal is imminent, and GBP/USD hit fresh three-month highs. However, "it ain't over until the fat lady sings." 

Here are five scenarios:

1) A deal is reached and hardliners back it

In this scenario, the PM convinces the Brexiteers that letting NI drift away – proposals that he objected in the past – is the best possible option to get Brexit done. Labour MPs from Leave-voting constituencies to back it, and it is then set for sailing through parliament on Saturday, October 19.

GBP/USD would surge and perhaps hit 1.32. The probability is medium.

Markets desire a soft deal – perhaps the Norwegian model – and preferably no Brexit at all. However, the pound has been pricing in a no-deal as late as September, and its recovery does not price in an accord – just a short delay. The rally we have seen may only be the beginning. 

2) Deal without support

The DUP may convince Conservative hardliners to reject the agreement, and Labour MPs would refuse to back a "Tory Brexit" in this scenario. However, all sides may agree that elections are the way out – and the UK asks for an extension. Johnson may be convinced that a new House of Commons would provide the seal of approval.

In this case, the pound may drift lower on uncertainty, but not collapse. It could undo the recent gains and fall to around 1.22. The probability is medium-high.

A victory for Johnson may seal the deal, while a Labour-Liberal Democrat win may trigger a second referendum and eventually revoke Brexit. Despite uncertainty and markets' preferred options, the downside is limited. 

3) Agree to meet again soon

London and Brussels may conclude that substantial progress has been made but not enough to declare victory. The idea of an emergency summit – before the end of October – has already been floated and may turn into reality. In this scenario, both sides agree to continue with around-the-clock talks to finalize the accord by the date of the summit.

Brexit would be delayed in this scenario – but only by a few days or weeks. While the PM would be forced to ask for an extension until January 31, 2020, the EU would grant only a short delay, in the spirit of getting a deal done shortly. 

This scenario, which has a high probability, would probably keep GBP/USD at the current broad range of 1.26 to 1.2750.

It would be a continuation of the current situation.

4) No agreement and forced extension

If the UK and the EU fail to agree on a pathway to Brexit, Britain will be on course to ask for an extension – but more significant uncertainty may send it lower – even if an imminent no-deal is averted. 

In this scenario, Johnson is forced to ask for a three-month extension, but the EU decides on a delay until June 2020. That would open the door to holding a second referendum – which requires time to organize – but markets may be wary of the endless drag.

This scenario, which has a low probability, will probably send the pound gradually lower, perhaps initially to 1.23-1.24, and then further down as economic data weigh on it.

5) A total breakup of talks and a hard Brexit

If this significant push to reach a deal fails, the EU may be growing tired of endless Brexit negotiations – just like the British public.

Even if the PM fails to circumvent the Benn Act and ask for an extension – he may get the EU to reject it. They may not require his help.

French President Emmanuel Macron and other leaders may want the UK to get over with it and leave – even if the price is economic damage.

This scenario of a no-deal Brexit has very low probability – and would send GBP/USD plunging to 1.10.

Conclusion

The Brexit talks are at a delicate stage, and GBP/USD is already experiencing high volatility. The situation may change rapidly around the EU Summit and go in the five scenarios listed above. 

Author

Yohay Elam

Yohay Elam

FXStreet

Yohay is in Forex since 2008 when he founded Forex Crunch, a blog crafted in his free time that turned into a fully-fledged currency website later sold to Finixio.

More from Yohay Elam
Share:

Editor's Picks

GBP/USD clings to multi-day peaks below 1.3500

GBP/USD trades with marked gains on Friday, now giving away some gains following an earlier surpass of the key 1.3500 yardstick. Indeed, Cable gathers fresh steam amid the strong offered stance in the Greenback, all after US NFP badly missed expectations in July.

EUR/USD: Post-NFP bounce falters around 1.1580

EUR/USD reverses Thursday’s decline and trades with solid gains in the 1.1560 region, or two-month peaks, on Friday. The pair’s firm performance comes in a context of a sharp correction in the US Dollar as investors continue to assess disheartening US NFP readings.

How Wall Street rigs the game [Video]

In this week’s Live from the Vault, Andrew Maguire is joined by Peter Antico and Sean Stone to discuss the Paradigm of Money - an in-depth expose of financial market corruption, from naked shorting to the two-tier system that protects Wall Street.

XRP Price Forecast: XRP nears critical $1.00 support
Ripple (XRP) remains pressured on Friday, trading around $1.03 at the time of writing. The token appears to hold this current level as support but lacks a catalyst to sustain a knee-jerk rebound toward the next key resistance at $1.10.
Is Gold about to enter its biggest bull run since 2020?
Gold has stormed back into the spotlight and its next move could leave late buyers chasing. On August 5, the yellow metal surged almost 7% – roughly $174 – to close near $4,308 an ounce, posting one of its biggest daily advances in recent history. A weaker U.S dollar, falling Treasury yields, changing Federal Reserve expectations and renewed safe-haven demand all struck at once.
9-3: Is the Federal Reserve’s vote tally Warsh's new forward guidance?
The rate did not move. Neither did the statement, and that’s the more interesting fact. Set the July 29 Federal Open Market Committee (FOMC) statement beside the one issued on June 17, and the two documents are identical apart from a single verb and a paragraph at the bottom naming three dissenters.