• With fewer than 50 days until Brexit Day, all the options are on the table.
  • Brits living in the continent and Europeans in the UK are thinking what to do with their funds.
  • There are five plausible scenarios with different outcomes for the euro/pound.

Time is running out to reach a deal on Brexit, with fewer than 50 days left to go. UK PM Theresa May is trying to find a deal that may pass muster in the House of Commons, be acceptable to the European Union, and not break up her party. 

This sounds like mission impossible, but stranger things have happened. And there is always the option not to take a decision: push the Brexit date back. 

What are markets pricing in? The short answer is "a bad Brexit" but not a no-deal, cliff-edge fall.

At the time of writing, EUR/GBP is around 0.88 or GBP/EUR is around 1.14. 

Where will the cross go next?

1) May's Brexit

The PM's tactic is to run down the clock, forcing soft Brexiteers to vote for a deal they don't like or risk no Brexit. And also forcing some Remainers to vote for a Brexit deal than wrecking the economy. Given the gap in the original January 15th vote, 230 MPs, the chances are slim. 

May's deal will provide relief to the pound by averting a hard Brexit but is also a favorable scenario for the euro-zone, that avoids damage. The pound may be the winner, with a solid margin.

Euro/pound could drop to 0.80 - pound/euro at 1.25.

2) A hard Brexit

This is the default option and with no solution, the chances are growing. A no-deal Brexit will likely inflict severe damage to the UK and also hit Ireland, France, Belgium, and the Netherlands quite a bit.

Both currencies are set to suffer against the safe-haven USD Dollar. Yet against each other, the euro is set to come on top, and probably by a broad margin especially amid images of grounded flights and the deployment of troops. While many issues could be resolved quickly, the panic could result in historic levels.

In this extreme but not so unlikely scenario, we could see parity: EUR/GBP = GBP/EUR, at least for a short time. 

3) Extending Article 50

Kicking the can down the road is a common EU practice. It happened so many times with Greece, and the EU is often treating the UK like Greece. And it is human nature to procrastinate instead of taking hard decisions.

For markets, it may provide some temporary relief, but significant movements are not on the cards. The pound could gain some ground, but not too much.

All in all, euro/pound could drop to 0.83 - pound/euro to rise to 1.20.

4) Norwegian-model deal

Norway is not an EU member but is bound to the bloc by extensive agreements. It pays into the EU budget, allows free movement, and participates in the European single market. Adopting the model will be economically beneficial for the UK even though it loses its influence. 

The model is something the EU cannot refuse to, as it already exists. The UK just needs to take it off the shelf. And this model probably has broad support in parliament, as it does not cause damage.

However, it is branded as BRINO: Brexit In Name Only by those who want a fully independent UK. Going for the model risks tearing the Conservative Party apart. Therefore, the chances are not high.

Low probability and a high reward mean a significant movement in favor of the pound.

EUR/GBP could fall to 0.75 - GBP/EUR to 1.33. 

5) Second Referendum

The People's Vote group celebrated when May's Brexit deal failed, and they thought the chances of a second EU Referendum increased. At the moment, Labour is not really backing it, as Euroskeptic Jeremy Corbyn sticks to his doubts about the bloc and ignores members who voted for him. 

But this can change and parliament could legislate a referendum with two options: May's deal or no Brexit. They could also allow three options: May's deal, no Brexit, or a no-deal Brexit, something that would be very risky. 

Assuming the options are the deal and no Brexit, markets would likely rejoice on the chances that voters will bury Brexit. Opinion polls show solid support to Remain. These polls can quickly change once the campaigns begin, but markets respond to what they know at the moment. 

In this scenario, which has medium chances, euro/pound could plunge all the way to 0.70 = pound/euro at 1.42.

Conclusion

The current calm in pound/euro set the stage for a storm as Brexit is the No. 1 issue affecting the cross. Under these main five scenarios, EUR/GBP has a 40% range, and this is not exaggerated. 

 

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!


Latest Forex Analysis

Editors’ Picks

EUR/USD slips below 1.08 amid weak data, coronavirus headlines

EUR/USD is trading below 1.08 as eurozone Sentix Investor Confidence plunges to -42.9, around the 2008 crisis levels. Encouraging coronavirus headlines kept the euro bid earlier.

EUR/USD News

GBP/USD under pressure amid concerns about UK PM´s health

The GBP/USD pair is under pressure trading below the 1.2300 level as news that PM Boris Johnson has been hospitalized due to “persistent symptoms,” according to his spokesman. Rumors mounting Johnson is in worse shape than reported.

GBP/USD News

XRP leads cryptos on the verge of a new bullish trend

XRP/USD crosses the long-term bearish channel ceiling and signals the launch of a new uptrend in the crypto market. Ether should be the positive player in the coming weeks. Market sentiment remains very pessimistic despite the significant improvement in recent hours.

Read more

Gold: Bulls remain in control near 2-week tops, around $1640 region

Gold gained positive traction for the fourth consecutive session on Monday and climbed to near two-week tops, around the $1638 region during the mid-European session.

Gold News

WTI rebounds above mid-$27s as investors stay focused on OPEC headlines

Crude oil prices came under strong selling pressure after developments over the weekend revealed that the OPEC+ emergency meeting got postponed to Thursday to give more time to sides to negotiate.

Oil News

Forex Majors

Cryptocurrencies

Signatures