The pound can survive the meaningful vote (but not a general election) – Jasper Lawler, LCG Head of Research.

 

Parliament is set for a “meaningful vote” on Theresa May’s Brexit deal tomorrow. Most MPs appear to be against it, suggesting the deal will be rejected. A rejection is expected to be negative for the pound whereas a surprise approval should be positive.

For the pound, we think the element of surprise means an approval would create more upside than a rejection would downside. In the event of Mrs May’s deal being rejected, what happens next could be the most troublesome for Sterling. Any sell-off in GBPUSD after the deal gets rejected would be complicated by the assortment of follow-up outcomes.

If the defeat is big enough, opposition leader Jeremy Corbyn could trigger a vote of no confidence, which if successful, would mean a general election. The possibility of a Labour government with John McDonnell at the helm of the economy would send a collective shudder through markets. A vote of no confidence could generate a spike down in GBPUSD, with another drop below 1.25 if it is successful. For it to be successful, a vote of no confidence would likely need conservative MPs to vote against their own party. We suspect Corbyn will bide his time, avoiding a vote of no confidence until a second “meaningful vote” is rejected.

Attempts could also be made to force MPs to vote on having a second referendum. A so-called “People’s vote” could take GBPUSD well north of 1.30 within minutes of being announced. The prospect of all Brexit uncertainties disappearing would attract huge sums of capital that has been “on the sidelines” during negotiations.  A second referendum is for obvious reasons popular inside parliament which is overwhelming in favour of remaining in the EU. Still, most MPs view this as going against the spirit of democracy. We don’t think a majority of MPs would openly advocate a second referendum until a No Deal scenario is right on the doorstep

For short term Sterling bulls, the best-case scenario is probably the can being kicked down the road. That is, Theresa May is given the chance to improve the deal and hold a second “meaningful vote” in a few weeks.

But kicking the can too far will have negative consequences. It seems likely there simply will not be time to make the necessary changes in May’s deal before March 29, especially if there is a general election. Anecdotally, the Brexit-voting public seem very comfortable with exiting the EU without a deal but there is very little taste for it in parliament. We think a Brexit delay by revoking or extending Article 50 is ultimately what we are facing. Delaying Brexit might allow trader’s attention to get diverted elsewhere and put a floor under Sterling, but the resulting uncertainty would be one of the worst scenarios for businesses and the British economy.

 

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About the author

Jasper delivers regular commentary, seminars and webinars on market news, trading analysis, strategy and psychology. He is regularly interviewed by BBC News, Bloomberg, CNBC and Sky News, and has featured in The Times, Guardian and Daily Telegraph. Jasper hosts a weekly charting analysis webinar. He is qualified as a Chartered Market Technician (CMT) with the Market Technician Association, and has a degree in Finance and Economics.