All eyes on London: Handicapping the Brexit vote on Sterling
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The vote on Prime Minister May's Brexit deal will dominate global markets on Tuesday.
Option 1: Brexit passes. All handicappers give this next to no chance, still Parliament has been known to produce unexpected results. Sterling will soar the more so because it will be unexpected: 1.3100 immediately, 13250 then 1.3500. Eur/Gbp will drop to 0.8700 then 0.8550. The euro will rise modestly 1.1550-1.1600
Prime Minister May needs about 320 votes out of 650 (some members don't vote or are absent or their votes are not counted) for victory. If the margin is 50 or less, particularly if the Murrison amendment setting a December 2021 end date for the Irish backstop is included, the Prime Minister will consider this a victory and likely release a statement with plans to return to Brussels seeking concessions. A margin of 50 or below is a clear indication that the PM has sufficient support to try for a second approval. It may also provide the EU with some incentive to be accommodating. The sterling will rally but with a near cap, likely 1.3100 and 0.8800 in the cross. The euro could move to 1.1550
A margin between 50 and 100 will be harder to play as a path to EU negotiations and eventual passage but Ms May will probably try. The currency effect would be negative though limited especially if Ms May pursues the same approach as above.
Option 3: Brexit is defeated by 100 or more votes. A loss by this large a margin makes its very difficult for Ms May to carry the argument for the deal forward, either in Britain or in seeking help from the EU. A second Parliament vote is unlikely. Without her Brexit deal the default is a non-negotiated exit on March 29th. Ms May could announce immediate preparations for a no-deal exit but Parliament would rebel and she would probably lose a no-confidence vote. Any alternative would require more time than remains before the departure deadline. The responsible and probable course is a request for an extension of the deadline to allow time to sort out the several options. The EU would give swift approval to the request. Sterling will drop to 1.2500 and the cross will rise to 0.9100. The euro might fall to 1.1375.
If Ms May does choose a March 29th exit the pound could fall 10 figures to 1.1800 and then further, the cross to 0.9250 and beyond. The euro would also get hit with 1.0950 possible.
The above scenarios are immediate reactions to the vote. Further movement would depend on the political play between the various alternatives none of which currently command a majority of Parliament or public opinion. As long as the uncertainty lasts it will have negative effects on the British economy and the pound.
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