It is highly likely that Prime Minister Theresa May will lose the vote. GBP/USD could fall sharply by at least 1%.
Tomorrow morning at 3am (SGT), UK MPs will be faced with a choice to either accept or reject the Brexit deal UK Prime Minister Theresa May has negotiated with the European Union. If they were to accept it, it will set the country on its last mile towards leaving the EU on 29th March. If not, it will leave the country in the state of limbo it has inhabited for 2.5 years.
At the current juncture, it seems like Prime Minister May is expected to lose by a huge margin of more than 100 votes. She has also emphasised that she does not believe the UK should delay leaving and thus will not be extending article 50 which allows the extension of Brexit beyond 29th March.
Here is an infographic to explain what could happen:
There are 3 things that could happen tomorrow morning 3am (SGT) and how it could affect the sterling:
a. UK Parliament accepts the withdrawal agreement
b. UK Parliament rejects the withdrawal agreement by a narrow margin
c. UK Parliament rejects the withdrawal agreement by a huge margin
If a. happens, whereby they accept the agreement:
This will surprise the market, pushing sterling to a new high. We could see GBP/USD moving to the 1.3200 level before edging towards 1.3000-1.3500 in the longer term. Given that Prime Minister May is widely expected to lose the vote, the surprise win would set off a short squeeze in sterling.
If b. happens, whereby the agreement is rejected by a small margin:
Prime Minister May requires 318 votes from the MPs to pass the withdrawal agreement. If she loses the vote by 50 or fewer votes, this could give her the confidence that renegotiation is possible, and she will return to the EU for concessions on the backstop. This could bring GBP/USD to the 1.3000 level without much extension as the market will be waiting for updates on the next step May would take.
If c. happens, whereby the agreement is rejected by a large margin:
There are only two choices Prime Minister May could take – to either invoke Article 50 which is to extend the Brexit date beyond 29th March or admit defeat which would force the UK to end up with a no deal. Either way, GBP/USD will head south to the 1.2500 level and lower depending on which option May were to take.
If May were to lose the vote, there could also be a second referendum to decide whether to leave the EU. Furthermore, a vote of no confidence could be called to change the Prime Minister. Lastly, May could call for a general election in order to get political mandate for her deal.
Fullerton Markets Research Team
Your Committed Trading Partner