Is No Deal Brexit a fading risk?


It was always going to be a tough week for Prime Minister May, with the likelihood of passing the withdrawal agreement through Parliament always looking doubtful. And so, whilst Tuesday’s defeat came as no surprise, the scale of the defeat was historic – 432 MPs (vs 202) voting against it, the heaviest parliamentary defeat of the democratic era. The supposed tactic of delaying the vote from December to garner the support of more MPs had clearly failed.



Less than 24 hours later, the Prime Minister successfully saw off a motion of no confidence (tabled by Jeremy Corbyn as expected) – ironically by a ratio of 52:48. It was very clear that the DUP’s 10 MPs were the difference between winning and losing the vote.



Despite the continued jabs at Theresa May’s government, FX markets saw GBP outperform both USD & EUR for the week, trading to a high of 1.30 & 1.14 respectively – levels not seen since November last year. Given the continued political uncertainty at Westminster, this reaction may not make any immediate sense. The rationale lies around the Prime Minister’s pivot to accepting a cross party solution and given there is a large parliamentary majority in favour of a softer Brexit outcome, the odds of a market friendly outcome have risen sharply.



Over the weekend, an alliance of cross-party MPs posturing to override the government to suspend or delay the article 50 process to leave the EU in their attempt to prevent a no deal Brexit.



Meanwhile, the official stance from the EU has seen little change since the upheaval at the UK Parliament but supportive rhetoric continues to emerge from certain EU states – German Chancellor Angela Merkel urged her partners in the European Union to work with the United Kingdom on a compromise for the country’s divorce from the bloc and avoid a no-deal Brexit.



For their part, the EU have indicated that they may be willing to allow a short extension of the 29th March date, however anything beyond July 2019 would be extremely tricky, as that’s when the new MEPs take their seats following the European Parliament elections in May – putting the UK’s role into question. It will ultimately allow more time for the political process in the UK to coalesce around an alternative to Prime Minister May’s plan, after all, there is less than 40 legislative days till the March deadline.



All this points towards a delayed softer Brexit.



The clear risk to this outcome is if the Government faces a General Election should another vote of no confidence be tabled. As previously highlighted, the Conservative government remaining in power hinges around retaining DUP support. While the DUP party does not explicitly say they would vote against the government if a Brexit deal with a backstop passes and Labour subsequently tries another vote of confidence that is the clear implication of their position.



Of course, for now, markets anxiously await May’s “Plan B” (which will then be subject to a vote on 29th Jan) – a deal that at least her party & the DUP can coalesce around. A stronger USD environment over the last couple of days has seen GBP trade off its highs but any sort of sign of a deal should give the impetus to push GBP through the highs (despite the fact PM May will still need to go back to Brussels to approve concessions).



With the developments in the political arena in Westminster, we thought it would be prudent to revisit the probabilities around the three main Brexit scenarios:






The turn of events has seen the odds of a no deal/hard Brexit vastly reduced with No Brexit not gathering any further support.



So yet another tumultuous week for UK politics passes with investors still remaining in a holding pattern whilst UK politicians get closer to deciding how to manoeuvre around this ‘now’ very tiresome impasse however the end may be nigh.



Author: James Sebastian



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