Brexit Monitor: The real test is the vote in the House of Commons

According to media reports, PM Theresa May and the EU have reached a (technical) agreement on the UK's withdrawal from the EU. The market responded accordingly by strengthening the GBP and EUR/GBP fell to 0.866 but later recovered back above 0.87. We had not expected PM Theresa May would be able to pull it off this week given she has been under heavy fire from all sides of British politics, so this is a positive development. We still do not know the exact content of the deal but, according to media reports, the backstop will be UK-wide although Northern Ireland has to stay aligned with most EU single-market rules.

The UK Cabinet will meet today at 15:00 CET to discuss the draft text and whether it can support it or not. Also, the EU ambassadors meet with the EU's chief negotiator Michel Barnier to have a look at the text. While we think it is smooth sailing for the EU to agree on the text, it is more difficult to say how the UK Cabinet will react. Many ministers have been very clear that they cannot say yes to a withdrawal agreement where the UK is not able to leave the EU customs union unilaterally (see The Guardian for a full list of which ministers may resign over the deal). They fear such an arrangement would leave the UK inside the customs union forever, making them unable to make free trade deals with other countries. Media reports suggest that the deal includes a review/exit mechanism but not the details of how it looks. It will also be interestingto see whether the deal includes an option to extend the transition period beyond 31 December 2020, an idea which was floated last month. We also do not know at this point whether the deal includes a ‘backstop to the backstop' (EU's demand), which, however, seems likely if the UK is, in one way or another, to leave the UK-wide backstop. As we mentioned in our latest Brexit monitor, this is also the impression one gets from the letter PM Theresa May sent last week to DUP leader Foster.

If both the UK Cabinet and the EU say yes to the deal, the EU will most likely call for an extraordinary Brexit summit later this month (25 November has been suggested), where the EU leaders will give their approval. However, as we argued in the previous monitor, we think the real test was not whether PM Theresa May could sign a deal with the EU, but whether it can pass the UK House of Commons. We have to listen closely to statements from different political parties (and not least different wings of the parties) and top politicians. Leading Brexiteer Boris Johnson has already said he will vote against the deal, as he argues it will make the UK a vassel state, see Daily Mail. Jacob Regg-Moss has done the same. Brexit hardliners voting against the deal are probably at least 25 persons but could easily be more. In a letter (Twitter), the DUP's leader Arlene Foster has stated the deal will weaken the Union and is not in the national interest.

The fact that we do not knowthe responses from the UK Cabinet, EU leaders and not least whether a majority in the House of Commons can support the deal explains why the GBP strengthening was only to a limited extent. This also means that the renewed Brexit optimism may fade again in the very near term, sending EUR/GBP higher. GBP is likely set to stay volatile.

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