GBP rebounds as the risk of no deal diminishes

Posted on January 16th, 2019

The GBP sinks and rebounds on the decisive vote in the UK parliament against the Brexit deal negotiated by UK PM May and supported by her cabinet.  In our view, most probable scenarios for what comes next moves the UK towards a softer Brexit, where it agrees to accept EU rules to stay in the customs union, or ditches Brexit altogether.  The odds of a no deal (WTO) Brexit is now so low, in our view, it can be largely dismissed. As such, we see the downside for GBP to be greatly diminished and, if it occurs should be short-lived and relatively shallow; as it was today. Conversely, we see the room for the GBP to rise as the risk of a no-deal (WTO) Brexit is priced-out, and the higher probability of a softer or ditched-Brexit is priced in.


The gyrations without clear direction in GBP appear to reflect the lack of certainty over the path forward, high emotions, and the historic nature of the parliamentary impasse clouding judgement.

However, none of the events today – the no vote, and subsequent call by the Labour Party opposition leader Corbyn for a vote of confidence in the government – should have been unexpected.  They move the process forward towards a resolution, albeit still with significant uncertainty, and lessen the odds of a hard or no-deal (WTO) Brexit.

The Labor Party policy is for a softer Brexit, and when push comes to shove, there are enough MPs in the Conservative Party that would prefer this outcome and/or a fresh referendum that put a set of three or four alternatives to the public now better informed on what Brexit means.

It appears that public support for Brexit has tired and a better-informed public would vote against it in all probability.

One possibility in the wake of this vote was that PM May might have resigned to allow a new leader to adopt a new party position.  It appears that this is not her intention.  Instead, she took the only other sensible route, and that is to call for her party to debate a range of alternatives.

In fact in breaking news, PM May has called for cross-party talks.  This suggests that she is willing to move the debate across party lines to include the opposition parties.  This would seem to even more clearly move the needle towards a softer Brexit.

Tomorrow the UK Parliament will be devoted to the confidence motion.  The Labour Party will argue that it is time for a fresh election.  It is possible that Labour Leader Corbyn adopts a call for a fresh referendum in an attempt to draw out some Conservative votes.  However, in all likelihood, the confidence vote will up-hold the Tory government.  PM May’s concession that alternative policies be debated should ensure the support of her party to avoid a fresh election; at this stage.

Either way, the case is building for a softer Brexit outcome where the UK opts to remain in the customs union, or calls for a fresh referendum.  The support for a no deal Brexit appears quite low in parliament.

The Tory Party is hopelessly divided on Brexit; they could ham-fistedly push on to try and reach a policy agreement.  This could raise tensions by using up time ahead of the 29-March deadline.  However, doing so risks eventually forcing ‘remainers’ or ‘soft-Brexiters’ in the Conservative Party to support the Labour Party in a confidence vote and bring down the government.  At the very least they will support a motion that will receive wide parliamentary support to prevent a no deal (WTO) Brexit.

The actions of PM May today, in the wake of the vote, to call for cross-party or intra-party debate, suggests that she sees the only possible way forward is to gain support from the opposition parties to achieve a Brexit.  The only Brexit that will receive sufficient cross-parliamentary support is a softer version where the UK stays in the customs union indefinitely.

A soft Brexit will no doubt renew howls of “Brexit in name only”, raising the question of what’s the point – we lose more than we gain?  In which case the calls for a fresh referendum might gain traction with support from even the hard-Brexiters that would prefer at least the chance to put the question back to the people.

A new referendum would only make sense if the question was asked with a range of alternatives that were more clearly defined and agreed in principle with the EU.  The complexity of such referendum is the greatest argument against it.

An alternative would be a fresh election where each major party set out a clear policy choice, perhaps with their own proposed narrower set of referendum questions that could be more manageable.

It is entirely possible that failing to reach internal party agreement the Tory Party itself calls a fresh election with a new leader that offers the public a clearer policy choice.  Vacillating and running up against the 29 March deadline will only increase the risk of a vote of no-confidence in the government and forcing a new election that would probably result in a  more crushing, humiliating defeat for Conservatives.

Most of the possible outcomes require an extension on the 29-March deadline.  The EU would be reluctant to extend the deadline if the UK parliament appeared deadlocked and likely to vacillate.  However, they are unlikely to object if the extension paved the way to reformulate a softer Brexit plan that was likely to achieve cross-party support or to facilitate a fresh election or referendum set out on better-defined policy options than simply leave or remain.

Support for a no deal (WTO) Brexit is so limited it is extremely unlikely to fly, and opponents of this outcome in the Conservative Party will cross party lines to prevent it from happening.  PM May’s actions today, calling for cross-party debate, suggests she knows this and is unwilling to attempt to force the party to the brink of a no deal or her deal; it’s not in the interest of the country, it won’t save her position as PM, and it won’t succeed anyway.

As such, all probable scenarios lead towards a softer or ditching Brexit.  The GBP is likely to bounce as the market perceives the UK economy is better served with assured access to the EU single market.  The GBP would even rebound if May’s deal miraculously found support as this would provide a minimum two-year transition period.  The GBP appears to have built is some risk of a no deal (WTO) Brexit suddenly imposed after 29-March, and just prolonged uncertainty.

The no-deal (WTO) Brexit seems virtually out of the question.  Uncertainty remains high, but it is also diminishing as the decisive no vote on the May deal forces the PM to change course.