GBP/USD Forecast: 5 Scenarios for Big Brexit Wednesday, 4 pound-positive

The British House of Commons will hold indicative votes on the way forward on Brexit on Wednesday, March 27th. The vote is due at 19:30 GMT with results coming out around one later.

Speaker John Bercow will decide which options are up for votes. These may include options ranging from a no-deal Brexit, through various forms of softer Brexit options (Single Market participation, permanent customs union), through a second referendum, and up to revoking Article 50 altogether. 

Members of Parliament will then vote Yes or No using pen and paper and the outcome will be made public.

In addition, UK PM Theresa May continues pushing through her twice-defeated Brexit deal. The chances of passing remain slim but are rising. The leader of the European Research Group (ERG) Jacob Rees-Mogg is warming up to supporting it in order not to risk Brexit. However, it is unclear how many ERG members are with him.

May will address the 1922 Committee of backbencher MPs on the same day, at 17:00 GMT. Some expect her to announce her retirement date in return for her colleagues' support for the accord. She may also announce that the third Meaningful Vote will take place on Thursday or perhaps on Friday, March 29th, the original Brexit date. 

The Northern Irish Democratic Unionist Party (DUP) continues rejecting the deal. Its Brexit spokesman Sammy Wilson went as far as suggesting a one-year delay to Brexit is better than providing support. 

Needless to say, additional developments can happen. Assuming what we know, here are the main scenarios and the potential pound reactions:

1) Clear soft-Brexit option, no support for May's deal

This is the most likely scenario as most MPs are pro-Remain while opposition to May's deal remains high. In this scenario, the pound could rise on hopes for a softer Brexit, but it is important to note that the indicative votes are not binding.

GBP/USD has room to rise, but not too much.

2) No clear result in Parliament, no support for May's deal

 If MPs are lost in internal fighting over the multitude of options, the votes could result in MPs not indicating what they want. The sense of chaos could continue and GBP/USD will have room to the downside.

Fears of a no-deal Brexit will increase. GBP/USD could drop quite a bit.

3) No clear result in Parliament, but DUP support for the deal

DUP leader Arlene Foster has not spoken yet. Like Rees-Mogg, she may reach the conclusion that Brexit may slip away and will reluctantly support the deal. A third vote is announced and after DUP support, more Conservative MPs rally around it. Together with Labour revels from Leave constituencies, the accord finally passes and the UK leaves the EU on May 22nd.

This scenario provides certainty but also Brexit. GBP/USD has quite a bit of room to rise, more than scenario 1.

4) A clear soft-Brexit result in Parliament, May quits

The PM will not go easily, but this is also one of the options. Under pressure from her party to take a harder line on Brexit and from Parliament for a softer one, May may call quits. The interim PM, perhaps her deputy David Lidington, may ask for a long Brexit delay until the UK sorts itself out. The prospects of avoiding Brexit, at least in the short-term, outweigh the uncertainty.

GBP/USD is set to rally in the short term. It will later depend on what the new government does, which could still be an adverse outcome.

5) Parliament calls for the second referendum on May's deal

This is also one of the less-likely scenarios but has significant arguments in its favor. The opposition may vote in favor of the deal only if it is approved by the people in what is called a "People's Vote" or a "Confirmatory Vote" by opposition leader Jeremy Corbyn. Such an outcome will also trigger the resignation of May but may lead to an awkward cross-party coalition to approve such a move. GBP/USD will not only rally on eliminating a cliff-edge Brexit but will hope for canceling Brexit altogether. 

This least-likely outcome can send Sterling skyrocketing. 

Conclusion

Brexit uncertainty remains high ahead of yet another critical day in the House of Commons and in the Tory 1922 Committee. With fears of a no-deal Brexit weighing on the pound, there is more room to the upside than the downside. Volatility is set to rise.