|

Brexit vote cheat sheet - 3 scenarios for GBP/USD

  • The House of Commons is due to vote on Brexit on January 15th.
  • It is hard to see it passing an uncertainty is very high.
  • Here are three scenarios with subplots and potential GBP/USD reactions. 

Weren't we here before? Yes, we were. The vote was planned for December 11th and we previewed it extensively

It was a busy month since then:

No vote, leadership challenge, and back to the drawing board

After the original December 11th vote was postponed when PM Theresa May realized the Brexit deal would suffer a colossal loss, Parliament is back from the Christmas break and ready to vote.

May then went on a tour promised to negotiate changes to the Irish backstop. Her counterparts said they are ready to provide clarifications to the deal and also reaffirm their intentions not to use it. However, they did not offer any alterations to the legal text. 

In the meantime, hard-Brexiteers mounted a leadership challenge and May won it by a not-so-convincing margin of 200 to 117 only after pledging to step down before the next elections. 

Nevertheless, the pro-Brexit camp remains adamant to vote against the deal and so does the Democratic Unionist Party (DUP) which vehemently rejects the accord. 

3 scenarios, the cheat-sheet version

The government was hoping that the delay will allow time for MP's to warm up to the withdrawal agreement. Hard-Brexiteers were scared with the option of no Brexit while the pro-Remain camp was menaced by the no-deal Brexit that would yield economic chaos. 

However, the political situation remained unchanged and the only thing that moved was time. The clock is ticking toward Brexit Day: March 29th, 2019. 

Here is the quick version of the three scenarios:

1) Small margin rejection

A respectable loss by around 50 MP's or fewer would be considered OK. The pound would only slide a bit while UK stocks suffer greater losses. May returns to Brussels, get further clarifications and comes back to parliament. 

MP's have an excuse to change their minds while they are worried about their seats and a Labour government. The deal narrowly passes and the Pound then rallies.

Probability: High

GBP/USD reaction: choppy, first down, then probably up.

2) Deal trashed

In this scenario, everybody that opposes the deal votes against it. The pound plunges and continues falling with uncertainty. 

There are three sub-scenarios here:

2a) Elections without a Brexit delay

The failure yields elections with prospects of a government led by Labour's Jeremy Corbyn. The double uncertainty about Brexit and the elections weighs heavily on Sterling. 

The winning party is then stuck with the same dilemmas.

2b) A second referendum

This option has gained traction in recent weeks. If Parliament cannot decide, why not bring it back to the people? Even if asking the people to make the "right" decision may anger many, it can improve the GBP's fortunes.

But will the question be? A choice between the deal and a no-deal Brexit? The deal or no Brexit at all? Or a three-way poll?

In any case, despite favorable opinion polls, Brits could repeat the same vote. Uncertainty is set to weigh.

2c) Revoking or delaying Article 50

The European Court of Justice allowed the UK to click Ctrl+Z and undo Brexit. Or, Britain could ask for a delay. Markets will likely cheer on any postponement of Brexit Day. GBP/USD could surge to pre-Brexit levels.

Probability: Medium

GBP/USD reaction: A plunge, unless MP's immediately plot revoking Article 50.

3) May wins

In this scenario, the aforementioned fear of losing their seats brings enough of Tory MP's to support the accord. The same applies for Labour MP's or some will just want to get over the issue and move onto talking about healthcare, education, etc.

Probability: Low

GBP/USD reaction: A surge.

Conclusion

The crucial January 15th vote (unless it suffers another delay) will have a considerable impact on the pound. The central scenario is a small defeat that could be remedied later on, thus causing a "buy the dip" scenario.

The second most likely scenario is that the deal is badly defeated, causing anarchy and there are at least three possible sub-scenarios including a Sterling-favorable revoking of Article 50. 

The most unlikely scenario is that the deal miraculously passes and cable jumps. 

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 bounces off lows, back above 1.3200

After bottoming out near 1.3160, GBP/USD manages to regain a bit of shine and reclaim the 1.3200 mark and beyond at the end of the week. Stronger-than-expected UK Retail Sales data seem to be helping the British Pound limit its losses, while the chaotic UK political environment keeps the bulls at bay for now.

EUR/USD looks consolidative around 1.1460

EUR/USD stages a modest rebound after slipping to a three-month low below 1.1420 at the end of the week. That said, the pair now looks to consolidate humble gains just above 1.1460 despite growing uncertainty surrounding the next round of US-Iran negotiations, which keeps the US Dollar’s downside contained.

Gold slips back to six-day lows, targets $4,100

Gold retreats for the third consecutive day on Friday, eroding gains seen in the first half of the week and approaching the key $4,100 mark per troy ounce. Indeed, the precious metal continues to face headwinds from the Fed's hawkish stance and renewed uncertainty surrounding the next round of US-Iran negotiations.

Breaking: Iran closes the Strait of Hormuz amid ceasefire deal violation
Iran says it is closing the Strait of Hormuz after accusing the United States (US) and Israel of violating the ceasefire. According to Iran, the decision came over the continued Israeli strikes in Lebanon. The Iranian Revolutionary Guard Corps Navy issued a warning to all vessels: "Do not approach the Strait of Hormuz; otherwise, your security will be jeopardized."
The Iran war didn't break the US economy, but what happens next?

Nearly four months after the start of the Iran war, the US economy remains remarkably resilient. While the conflict initially triggered a severe disruption to global energy markets and a sharp rise in Oil prices, recent diplomatic progress between Washington and Tehran has eased concerns about a prolonged supply shock.

Regime change: Inside Kevin Warsh's first move to make the Fed unreadable on purpose

The rate did not move. That was the least interesting thing about Kevin Warsh's first meeting in charge of the Fed. The FOMC held its benchmark at 3.50%-3.75% for the fourth straight meeting, exactly as priced, and then the new chair used his first press conference to dismantle the machinery the market has leaned on for a decade.