Brexit indicative votes may boost GBP

GBP  is chopping in a relatively narrow range around 1.32 as the market struggles to interpret the increasingly frantic developments in UK politics.

The GBP strengthened from its recent lows last week after the EU agreed to provide another two weeks for the UK to decide on a path, until 12 April.  This appears to have made space for parliament to come up with an alternative to PM May’s deal, and/or reduce the risk of an accidental no-deal Brexit.

However, the gains have been muted as it remains unclear what path the UK parliament will take.

The GBP seemed to strengthen on reports that ERG Chair Jacob Rees-Mogg might support May’s deal.  However, it is not clear why the market would like this outcome.

It is far from clear that even with Rees-Mogg’s support, bringing with it some other euro-sceptics such as those in the ERG, would be sufficient to achieve a majority for PM May’s deal.  The press seems to think it might, but it appears to me he does not have enough followers to make the difference.

Even if May’s deal scrapes in, it still requires the trade relationship to be negotiated over a transition period, and if Euro-sceptics are rallying behind it, it may tend to turn off Europhiles that want closer trade relations post-Brexit.

The GBP had been rallying on signs that May’s deal might get through in the past because it tended to reduce uncertainty over the path forward.  But passage of May’s deal by the slimmest of margins, combined with the likely removal of May as Tory leader sooner rather than later, a split Tory party over the Brexit issue, and a larger number of MPs that want to retain close trade ties with the EU is likely to bring forth an equally uncertain transition period that may seem never-ending.

As such, we are not sure the GBP should have gained on Rees-Mogg’s support for May’s deal.

The indicative votes on Wednesday for an alternative to May’s deal appear to have much more promise for the GBP, in my view.  A path towards an alternative plan appears to offer more chance of getting parliamentary support and provide more certainty to UK business.

The fact that a majority in parliament voted on Monday to allow the indicative votes appears to suggest that there is capacity for parliament to find a workable majority on an alternative. That alternative is likely to involve the UK remaining in a customs union with the EU, a decision that would please UK business and offer a way to solve the border issue in Ireland.  It would require a longer delay but would provide more certainty for the UK economy, setting the UK on a more workable path.

The bigger the majority that can be formed around one or more alternatives, the more pressure on PM May to ditch her deal and get out of the way of a cross-party process.

It is not exactly clear how the indicative votes may work, but one possibility is that MPs can vote for more than one alternative, suggesting they may prefer several in place of PM May’s deal.  This appears to raise the likelihood that one or more will get a clear majority of indicative support.

Wednesday’s votes are not binding, and it is not clear what May will do after they are conducted.  If they show significant majorities for one or more alternative options, she should feel increased pressure to support a cross-party process to solve the Brexit riddle.  This might split the Tory party to the point that Labour sees an opportunity to call another vote of no-confidence and force fresh elections.

Alternatively, if PM May rejects cross-party support for alternatives, it could also split the Tory Party and allow scope for a vote of no confidence and a fresh election.  May herself could admit her deal is dead and decide it is time to call an election.

May may just admit her deal is dead and resign leadership.  This raises the risk that Eurosceptics take control of the Tory party.  This might seem to raise the odds of a no deal Brexit, but it is also likely to raise the odds that it splits the party and results in a no-confidence vote and fresh elections.

The odds of a fresh election appear to be increasing.  In many respects, given the degree of the split in UK parliament, this would seem progress on solving the Brexit riddle.  It would force major parties to develop more cohesion around a Brexit policy, and give the people a chance to vote on those policies.

A fresh referendum could be part of party policy (Labour has said it now supports a new referendum), and could then be put to the people with a clearer understanding of the choices involved.

Undoubtedly there remains considerable uncertainty and scope for hyper-volatility in the GBP over the coming weeks. But in the near term, if the votes on Wednesday reveal a significant majority in favour of one or more alternatives to May’s plan, this should be viewed as moving the risks towards a more certain and better outcome or the UK economy, even if it suggests a longer delay.

The EU is likely to grant a long delay if parliament is moving towards an alternative plan with or without fresh elections or another referendum.

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Greg Gibbs,
Founder, Analyst and PM
Amplifying Global FX Capital Pty Ltd