When Boris Johnson became Prime Minister, he pledged that the UK will leave the EU on [or before] 31st October, with or without a deal. Although the Government’s preferred scenario is for an agreement between MPs and European Leaders to be reached, Michel Barnier, the EU’s lead negotiator, remains adamant that there is no scope for removing the controversial Irish backstop from the deal negotiated previously by Theresa May. Secondly, there is the issue that Britain is set to leave in 59 days and after last week’s announcement that Parliament will be prorogued between mid-September and mid-October, time is running out for the opposition to prevent a No Deal Brexit.

What can be done to prevent No Deal?

1. The Courts could over-turn the Government’s decision to shut down Parliament. The Government is currently facing two court battles – one in Scotland which is scheduled for a full hearing tomorrow and a second led by Gina Miller / John Major and a Victim’s Rights Campaigner in Northern Ireland claiming that a No Deal Brexit breaches the Good Friday Agreement.

2. A vote of no confidence. If MPs were to vote against the Government, a formal process would be triggered under the Fixed Term Parliaments Act. The Prime Minister then has 14 days to prove that he has the support of the majority of MPs. If another MP can prove they have a majority support, the PM would be expected to give way. Boris Johnson has said that even if he loses, he will refuse to resign thereby requiring intervention from the Queen. If no Government has been formed after 14 days, a general election will be triggered.

3. An early election could be either because the government calls it, or the government is forced into it (via a vote of no confidence). Rumours of an October election called by the government have been circling all day today. According to Betfair, the probability of an election in October has risen from 40% to 62% although at one point today, the market had it closer to 70%. Regardless of whether another election is triggered by the Government or via a vote of no confidence, a move to prevent no deal will almost certainly need more time. Theoretically, the Government (existing or new) could ask the EU for an extension, but whether or not it would be granted by the EU is another matter.

4. Obviously, the simplest way to avoid no deal, is for a deal to be reached before 31st October. Michel Barnier remains adamant that the controversial Irish backstop must remain in place, but beyond that, its not clear from either side what can / needs to change for a deal to be agreed. 

As stated previously, our base case scenario is still for a last-minute deal to be reached, allowing Britain to leave on 31st October in a semi-orderly fashion. Providing this is the case, we see plenty of scope for a relief rally in sterling back towards $1.30 in Q4.

However, as the clock continues to run down, confidence naturally begins to wane as risk continues to build. If another extension is agreed, there may be scope for a small rally in GBP, but only if it is accompanied by talk of an impending deal. Otherwise, we see further consolidation within the recent 1.20 – 1.22 range, with risk skewed to the downside if the Tory government looks to be loosing control.

Author: Marc Cogliatti