UK constitutional conundrum: Brexit and the High Court – Deutsche Bank

Oliver Harvey, Macro Strategist at Deutsche Bank, suggests that this week represents a significant step in the Brexit process as the UK High Court is set to deliver judgment on the judicial review brought against the government’s Brexit policy.

Key Quotes

“This concerns the ability of the government to trigger Article 50, the legal process to leave the European Union, without a parliamentary vote.

What are the possible outcomes?

If the High Court decides in favor of the government, and this is upheld by the Supreme Court, the result appears straightforward. The government would proceed with its current plan to trigger Article 50 by the end of March 2017.

If the High Court rules against the government, the outcome is less predictable. The claimants’ litigation concerns the legality of the Brexit process, but the judges may feel that prescribing next steps falls outside their powers, and leave interpretation to others. If upheld in the Supreme Court, a decision against the government would significantly increase the probability of a parliamentary vote on the triggering of the Brexit process.

What does this mean for markets?

The market is likely to react positively to a decision against the government, interpreting it as lowering the risk of hard Brexit. Given the uncertainty about the outcome, this presents a near term risk to short sterling positions. For that reason, we tactically take profit on our short GBP/NOK trade from the September Blueprint, although our forecasts below assume a vote in favor of the government as a base case.

It is unclear, however, how the result would play out in the medium term. It is likely to meaningfully increase political uncertainty in the UK and potentially trigger a constitutional crisis and, as we have noted, new general election. With the political prospect of overturning June’s decision currently slim, it is also likely to be unwelcome for the EU as it creates uncertainty about the ability to conclude the Brexit process before European Parliament elections in May 2019.

Updated forecasts

We take the opportunity to update our sterling forecasts. Consistent with our view of another 10% fall in GBP TWI in September, there is still scope for another ~5% fall in sterling on a trade weighted basis. To square with our bearish view on EUR/USD next year, this is currently envisaged to occur against the dollar. In the event of a more resilient EUR/USD, our EUR/GBP forecast would be revised up accordingly.”