3 Scenarios for today's Brexit vote

After moving higher versus the dollar for the past three sessions, pound traders were losing their nerve ahead of the Brexit vote in Parliament.

After moving higher versus the dollar for the past three sessions, pound traders were losing their nerve ahead of the Brexit vote in Parliament. This is not just about the deal being rejected or accepted by Parliament, the numbers involved will also be important. A loss by a small majority is by no means the same as a loss by a large majority, for Theresa May or the pound.
 

The three immediate scenarios that we are looking at are following the vote are:

1. Parliament accepts Brexit deal

This would e the most straight forward outcome, however it is also the least likely. Despite Theresa May’s pleas and threats, she is in need of a small miracle to push this deal over the line. Brussels have not been forthcoming with reassurances and concessions that would have made the deal more palatable for ministers. As a result, there has not been the change of tide within the Conservatives, or Parliament that Theresa May desperately needed.

This scenario is not expected and is therefore not being priced in by the market. Should Theresa May achieve the almost impossible and clear the deal through Parliament, the pound could rally sharply towards $1.31, before steadily climbing higher targeting $1.35.

2. Parliament rejects Brexit deal with a small majority

A small majority would be less than 50 votes. A loss by this amount could almost be considered a victory for Theresa May, given the battle that she has had to face convincing ministers that her deal is the only viable Brexit. Under this scenario we would expect Theresa May to want to put this back to Parliament for a second vote relatively quickly. She would turn to Brussels once again for reassurances and concessions. She may or may not receive anything back from the EU’s top brass.

This scenario could see the pound gain ground following the vote. However, gains would be capped at $1.30 as uncertainties persist over whether the deal will make it through on a second vote. 

3. Parliament rejects Brexit deal with a large majority

A large majority would be a loss of more than 100 votes. There have been suggestions that Theresa May could be facing a defeat by up to 200. This would not only be humiliating but would raise the question as to how the opposition party would react. Such a significant defeat could see Labour look to call a vote of no confidence in Theresa May, pushing for a general election. Domestic political chaos, the prospect of a Labour government and on-going Brexit uncertainty would be a toxic combination for the pound, sending it back towards the $1.20 and the post Brexit referendum lows.

Theresa May would need to decide whether to call a no deal Brexit, which seems unlikely at this stage. Alternatively, she will put forward the Plan B. This needs to be done by 21st January. An extension of Article 50 seems almost inevitable at this stage. This would offer some support to the pound as investors see the risk of a no deal fading.
A large majority defeat for Theresa May could see the pound drop lower as an immediate reaction, in a case of buy the rumour sell the fact. How the pound moves thereafter depends not only on what Plan B is, but also Labour’s reaction. 


Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.