Brexit – 2-years in the Making, Will the Deal be Good Enough?

The day of reckoning finally arrives for the Pound. Theresa May has managed to garner more concessions but will it be enough for Parliament?
Bob Mason
Brexit - Flag of European Union

Where We Are?

As the UK’s Met Office issues a yellow warning for today and tomorrow, in preparation of storm Gareth hitting the Isle, there’s another storm brewing.

Theresa May was in Strasburg on Monday, the British PM on a final mission to garner concessions to the existing Brexit deal.

Britain is to leave the EU in just 17 days. The fact that the UK government has failed, until now, to deliver an acceptable deal to parliament should come as no surprise.

So here we are… The UK economy has barely budged in the last year and British politics has joined the ranks of the Italian 5 Star/League and Greece’s Syriza party. Ironically, few member states are laughing, however. German Chancellor Angella Merkel is on her way out. France’s Macron snatched victory purely by way of France’s political system and Spain is about to go back to the polls.

A populist party here and a populist party there may be palatable for Junker and the Establishment, but a member state leaving the EU? That is an altogether different story.

Threats have been made before and will likely be made again, but it’s only Britain that has made the actual decision to leave.

No Deal?

Look at the movements in the Pound at the start of the week, the markets could have been mistaken to think that a vote in favor of “the deal” was imminent.

In reality, the start of the Pound’s rally came even with no final version of the deal being apparent on Monday. The Pound rallied by 1.04% on Monday. Did the rally come in response to the EU Commission President Juncker’s warm reception of the British PM?

Irrespective of whether there are further concessions made or not, the bigger question is on whether they are good enough for Parliament.

At the time of writing, the Pound was still on the move, up by 0.53% to $1.3220. Just a month ago, the Pound was at $1.28 levels. The only material difference is the market expectation that Britain will not be leaving the EU without a deal in 17 days.

The Vote

The news wires will be hectic in the lead up to today’s meaningful vote. A hectic day ahead will likely be reflected in the direction of the Pound. The volatility and sharp swings do raise questions on whether the market has a preferred outcome.

  • Option 1 is a deal and smooth departure from the EU.
  • Option 2 is an unacceptable deal that gets thrown out by Parliament. In such an eventuality, there are two possible ways ahead.
    • Parliament votes in favour of an extension to Article 50.
    • Parliament votes against an extension and Britain falls out of the EU with tremendous uncertainty ahead.

Just in case there was any confusion, Britain’s economic outlook near-term is as uncertain with or without a deal. The British government has been so transfixed and preoccupied with Brussels that trade agreements with other trading partners lie in waiting. Monetary policy has also been on pause following initial support in the wake of the referendum result.

Some have talked of the BoE making a move as early as the 4th quarter. With the economy growing by just 0.2%, it may be on the overoptimistic side.

It will ultimately boil down to today’s meaningful vote that with have a ripple effect on the Pound, the UK economy and eventually, even the EU economy.

What’s best for the Pound?

Option 1 delivers some certainty over the political landscape and should be positive for the Pound. In the event of Option 2…

The Pound would have to take a tumble ahead of a vote for or against delaying Article 50. After all, the market has been on the wrong side of a Brexit vote before…

How low could the Pound go in an Option 2 Scenario?

The Pound was at $1.28 levels back in February. While $1.26 levels may be too big a fall, a return to $1.28 levels seems reasonable. That would be in response to parliament throwing out Theresa May’s deal later today. Failure to extend Brexit could ultimately bring the Pound to its knees.

While highly improbable, there remains a possibility that Parliament would reject an extension to Article 50… A Doomsday event, which would have a cataclysmic impact on the Pound and UK politics.

We were in the eye of the storm and now it’s time for the main event. 2-years in the making… Back to the polls or will the Pound finally be able to move on?

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