GBP/USD: Market positioning for 'big majority' Brexit-vote defeat, and that is where the money is for Bulls on alternative outcomes

• GBP/USD bulls have lost their nerves ahead of the 8 GMT scheduled Brexit vote today when MPs will finally decide whether to approve or reject the Prime Minister's draft Withdrawal Agreement.
• Cable will depend on the various outcomes of the vote. 
• FX scenarios are 1.2000 / 1.3600 on the wides.

MPs have taken their seats in Parliament today for the final day of the debate on Theresa May’s Brexit deal and the long-anticipated ‘meaningful vote’. We have seen some tremendous price action in the pound crosses and cable in the lead into today's event while the Prime Minister attempted to use assurances from Brussels to convince sceptics to back her Brexit plan. She has even run the scare tactic that if her plan is not backed, Parliament will be running the risk of there being no Brexit at all.

However, the numbers are not stacking up and it is widely expected that she will not have enough votes to get her draft Withdrawal Agreement through Parliament and the market is positioned for a defeat. The numbers matter the most at this juncture because a loss by a small majority leaves the door open for a second vote whereby as a loss by a large majority will likely be followed by a leadership challenge - both scenarios are negative for sterling fo course, but the latter could really see sterling thrown into a bottomless pit. 

While it may be more prudent to stay on the sidelines and to trade the event in a professional manner rather than hold cash positions throughout the event, i.e. re-engage once some of the volatility and lack of liquidity risks subside, here are the Brexit vote scenarios:

• Brexit deal rejected with a no-confidence vote - Sterling negative.
• Delaying the Brexit date -Sterling neutral-to-positive.
• Small majority loss - Sterling neutral-to-negative.
• No-deal Brexit - Sterling strongly negative.
• Brexit deal approved - Sterling positive.
• No Brexit - Strongly Sterling positive.

FX scenarios:

Analysts at TD Securities' base case suggests GBPUSD could trade below 1.27 but find buyers ahead of 1.2615. "A narrow defeat would boost hopes that eventual passage is still possible and could see spot rally toward 1.32. A crushing blow, in contrast, increases tail risks in both directions with a very volatile reaction in markets likely. Hopes for No Brexit may prevail initially, but the risks of No Deal will also cast a long shadow."

But what if Parliament accepts the Brexit deal?

Well, that would be rather surprising, and the most straightforward of the scenarios. However, one would expect a strong rally in sterling with 1.3635 on the radar as being the 61.8% Fibo retracement target of 2018s decline. However, it is highly unlikely that the market could rally as far as that in a straight line, but 1.33, as a 100% retracement since October's decline is not out of the question. 1.3170 would be the most likely landing pad in the first instance, as being the 38.2% Fibo of the 2018 decline and has confluence with the 200-D SMA. 

A small majority loss of less than 50 votes

Theresa May would be seen as still in control of her position given how many she has won over and would be entitled to put this back to Parliament for a second vote, looking to Brussels for reassurances and final concessions. This would likely see a neutral play around the pound with a bearish bias given the uncertainties over a 2nd vote and whether she would be able to secure the reassurances and final concessions necessary to win more votes. 

Sterling is pricing in a large majority loss and here is what it could look like

A loss of between 100 - 200 votes would likely spark initial fears of a no deal Brexit. However, it is unlikely that PM May would call for a no deal Brexit immediately.  Instead, it would spur the Labour Party's opposition leader, Corbyn, to challenge PM May's leadership of the government which would mean a general election and political chaos in the UK's parliament. This would also throw up massive uncertainties over Brexit and be a very bearish cocktail for sterling and the UK economy and mean the BoE would be pushed to the back of the minds of market makers leaving sterling out to dry towards the post Brexit referendum low of 1.2000. At this stage, an extension of Article 50 would likely be called which could temper the bears in due course bringing some support for sterling once again, but a fade on rallies would likely be the state of play for the foreseeable future. 

GBP/USD levels

Cable has completed a falling wedge reversal pattern and targets the 200-D SMA at 1.3112. "Only a rise above the July, September and October highs at 1.3258/1.3363 would put the June high at 1.3473 on the cards," analysts at Commerzbank argued who suggest below 1.2444/27 will target the 78.6% retracement at 1.2109.