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GBP/USD: 3 scenarios for the January 15th Brexit vote

  • The House of Commons is due to vote on Brexit on January 15th.
  • It is hard to see it passing an uncertainty is very high.
  • Here are three scenarios with subplots and potential GBP/USD reactions.  

Weren’t we here before? Yes, we were. The vote was planned for December 11th and  we previewed it extensively.

It was a busy month since then:

No vote, leadership challenge, and back to the drawing board

After the original December 11th vote was postponed when PM Theresa May realized the Brexit deal would suffer a colossal loss, Parliament is back from the Christmas break and ready to vote.

May then went on a tour promised to negotiate changes to the Irish backstop. Her counterparts said they are ready to provide clarifications to the deal and also reaffirm their intentions not to use it. However, they did not offer any alterations to the legal text.

In the meantime, hard-Brexiteers mounted a leadership challenge and May won it by a not-so-convincing margin of 200 to 117 only after pledging to step down before the next elections.

Nevertheless, the pro-Brexit camp remains adamant to vote against the deal and so does the Democratic Unionist Party (DUP) which vehemently rejects the accord.

3 scenarios, the cheat-sheet version

The government was hoping that the delay will allow time for MP’s to warm up to the withdrawal agreement. Hard-Brexiteers were scared with the option of no Brexit while the pro-Remain camp was menaced by the no-deal Brexit that would yield economic chaos.

However, the political situation remained unchanged and the  only thing that moved was time. The clock is ticking toward Brexit Day: March 29th, 2019.

Here is the quick version of the three scenarios:

1) Small margin rejection

A respectable loss by around 50 MP’s or fewer would be considered OK. The pound would only slide a bit while UK  stocks suffer greater losses. May returns to Brussels, get further clarifications and comes back to parliament.

MP’s have an excuse to change their minds while they are worried about their seats and a Labour government. The deal narrowly passes and the Pound then rallies.

Probability:  High

GBP/USD reaction:  choppy, first down, then probably up.

2) Deal trashed

In this scenario, everybody that opposes the deal votes against it. The pound plunges and continues falling with uncertainty.

There are three sub-scenarios here:

2a) Elections without a Brexit delay

The failure yields elections with prospects of a government led by Labour’s Jeremy Corbyn. The double uncertainty  about Brexit and the elections weighs heavily on Sterling.

The winning party is then stuck with the same dilemmas.

2b) A second referendum

This option has gained traction in recent weeks. If Parliament cannot decide, why not bring it back to the people? Even if asking the people to make the “right” decision may anger many, it can improve the GBP’s fortunes.

But will the question be? A choice between the deal and a no-deal Brexit? The deal or no Brexit at all? Or a three-way poll?

In any case, despite favorable opinion polls, Brits could repeat the same vote. Uncertainty is set to weigh.

2c) Revoking or delaying Article 50

The European Court of Justice allowed the UK to click Ctrl+Z and undo Brexit. Or, Britain could ask for a delay. Markets will likely cheer on any postponement of Brexit Day. GBP/USD could surge to pre-Brexit levels.

Probability:  Medium

GBP/USD reaction:  A plunge, unless MP’s immediately plot revoking Article 50.

3) May wins

In this scenario, the aforementioned fear of losing their seats brings enough of Tory MP’s to support the accord. The same applies for Labour MP’s or some will just want to get over the issue and move onto talking about healthcare,  education, etc.

Probability:  Low

GBP/USD  reaction:  A surge.

Conclusion

The crucial January 15th vote (unless it suffers another delay) will have a considerable impact on the pound. The central scenario is a small defeat that could be remedied later on, thus causing a “buy the dip” scenario.

The second most likely scenario is that the deal is badly defeated, causing anarchy and there are at least three possible sub-scenarios including a Sterling-favorable revoking of Article 50.

The most unlikely scenario is that the deal miraculously passes and cable jumps.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.