What is it going to take to appease UK lawmakers on Brexit? Prime Minister Theresa May clearly hasn’t been able to find a solution to that pressing conundrum, after two years of draining negotiations with the European Union.
May’s “improved” Brexit deal was soundly rejected yet again by
Parliament on Tuesday evening, marking yet another defeat for the Prime
Minister. The signs are by no indication clear as to what will happen next and
traders are likely sitting at their desks once again preparing for the reality
that uncertainty still lies ahead. There will be another round of political
turmoil for the United Kingdom, with only 16 days remaining until it is
scheduled to leave the European Union at time of writing. This is what we can
say at this stage, but all else remains unclear as to what could happen next.
What those in the market need to prepare for on Wednesday is
another critical vote scheduled to take place in the United Kingdom. MPs will
vote later as to whether to block the United Kingdom from leaving the EU
without a deal on 29 March. This means that traders might be encouraged to
price in a few alternative scenarios, including the Pound dropping fast on the
prospect of a no-deal Brexit that is seen as a major threat to disrupting many
aspects of the UK economy, or alternatively, that the 29 March deadline will be
extended. The latter might be seen as a positive one for the Pound in some
aspects, however it was to a degree already priced into the valuation of the
Pound a few weeks back.
Delaying the 29 March deadline might now be viewed by traders as
“kicking the can down the road” and there is no indication at all that delaying
Brexit will not mean the same situation will repeat itself, so investors should
brace themselves that the hypothetical outcome of delaying Brexit is still
somewhat Pound-negative. A delayed Brexit is after all still distracting when
it comes to prolonging uncertainty, so a potential delay does not mean markets
should expect buyers to jump into Pound trades.
The most optimistic scenario for the Pound would of course be if
Brexit didn’t happen at all, but all investors should forget about this
potential hypothetical outcome for the time being.
There is too much uncertainty around what is potentially ahead for
the United Kingdom, including unpredictability on what can happen on a
day-to-day basis in Parliament, so no traders should be exposing themselves at
this point to an optimistic scenario that Brexit will not happen at all. This
shouldn’t be factored into market expectations right now. There is just too
much uncertainty and the clock is ticking fast on the threat that the UK could
crash out of Europe in 16 days without a deal.
We have already seen this week that the Pound’s 2.2% rally has
proved to be a false dawn, which ultimately led to the GBPUSD quickly
plummeting back to 1.30 before then bounding off what is proving to be a
psychologically-important level for the currency pair. This is why traders
should remain cautious ahead of Pound trades.
No clear-cut path in
Brexit drama – what could happen next?
Markets are bracing for even more twists this week. On Wednesday,
the House of Commons will vote on whether to proceed with a no-deal Brexit and
crash out of the European Union in just 16 days, which is the default event as
things currently stand. Should lawmakers press on with this much-feared,
worst-case scenario, markets could be in for a shock and the Cable could unwind
gains since as far back as 2017 and open a quick path back to 1.20.
However, the likelier scenario according to market expectations is
for lawmakers to vote against a no-deal Brexit on Wednesday, meaning that the
United Kingdom would be heading towards the likelihood that Theresa May asks
for a 29 March extension. This does present a potential opportunity for the
Pound to bounce back to 1.32. The advance in the Sterling earlier this week
does suggest that markets have already pricing an extension into the Pound. It
should also be noted that a request for an extension is by no means something that
will be automatically granted.
The Brexit extension however translates into prolonged uncertainty
for investors, businesses, voters and all other stakeholders, whose patience
has already been severely tested. A new timeline and deal would then have to be
negotiated with the European Union. As recent history has shown, this will not
be a straightforward affair.
Also, a second referendum could be on the cards. While such an
event may give the UK government a fresh mandate, UK politicians may then have to
face the wrath of voters. No matter where you look, there doesn’t seem to be a
clear-cut path in getting to the other side of this Brexit maze.
Brexit remains primary
driver for Pound
Besides taking its toll on UK-EU ties, Brexit drama may also throw
up domestic political risks. The current Prime Minister’s tenure may be drawing
to a close, given the political setbacks seen in recent months. This
potentially creates another layer of concern surrounding the outlook on the
Sterling.
Political noise has relegated the UK’s economic fundamentals to
the backseat when it comes to what is driving the Pound, as the currency
continues being buffeted by Brexit-related events.
Markets are certainly clamoring for clarity on Brexit.
Unfortunately, this major overhang doesn’t look like it’s clearing up anytime
soon.
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