The vote on the Brexit deal and possible effects on the markets


Tomorrow, it is expected Prime minister May will announce that the House of Commons will get to vote on the Brexit deal on the 15th of January. The upside for GBP seems to be limited. As things stand, May faces an uphill battle to convince politicians to vote in favour of the deal, with the most likely outcome being that the deal is voted down.

  • If by some miracle the deal is approved by the House of Commons, then this will catch the market completely off guard as no one is expecting this to happen. This is the one scenario where GBP rallies hard. A year or so ago, if this had been the outcome of a vote, we would have expected Cable to rally past the 1.40 level. But now, if Prime Minister May manages to get the deal through the House of Commons, then it can only be because ministers believe it to be the lesser of two evils. It is widely accepted that the deal on the table leaves us in a vulnerable position going forward. So, although it is likely GBP will rally hard as the market is largely positioned short, it is unlikely that Cable rallies as far as 1.40. It is more likely that Cable rallies initially to 1.33 and then in the following weeks to 1.36, as its upper level last seen in May of last year.
  • The more likely outcome is that the deal gets voted down and although this is largely priced in, it’s still negative for GBP. There are a few different scenarios that this may lead to. With GBPUSD around current levels of 1.2750, it is easy to see Cable initially moving down to the 1.20 level last seen in January 2017. From there it really depends on what is said after the vote is rejected. We either hang around this level or we take the next leg down to flash crash levels back in July ’16 of 1.1400/50. This will depend on how long it takes to come up with the next steps. Ultimately, it’s probable there will be a deal at some point with a lot of noise in between. This would involve a rejection next week followed by a deal at a later date which would force GBP lower short term. But provided Theresa May stays in power and if a rejection of the current Brexit deal leads to a revised, improved deal, this may ultimately be better for the UK and for GBP.  An improved deal does seem unlikely, however, based on EU posturing. 
  • There are of course several different scenarios that then may come into effect after next week. Labour could try for a vote of no confidence, potentially leading to a General election. Theresa May could go back to Brussels to try and negotiate a better deal (there are talks that she has already put together a cabinet committee of 21 ministers who will work on a contingency plan to engage with the EU). The Article 50 deadline may also be extended, with either the PM standing down or a no deal becoming official policy. 
  • The market hates uncertainty and so the short-term rejection of the Brexit deal can only be GBP negative. All of these permutations have short term uncertainty which means GBP will continue to be met with selling interest. Let’s get next week’s vote out of the way, before trying to speculate which of the permutations we then head towards and its implications. 
  • In the meantime, we look towards 1.33/1.36 as resistance levels on a positive outcome and 1.20/1.21 as initial support on a rejection of the Brexit deal. These levels may seem far away now, but any knee jerk reaction will bring these levels a lot closer. Just look at the night of the Brexit vote when the first result came through from Sunderland, when Cable moved from 1.48 down to 1.40 in the blink of an eye without any meaningful trading in between.

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