UK: On course for a hard Brexit?

According to Jane Foley, senior FX strategist at Rabobank, the strength of last night’s vote in the UK’s House of Commons against PM May’s Withdrawal bill makes it very clear that there is no deal in place between the UK and the EU.

Key Quotes

“Technically this means that the economy is on course for a hard Brexit. Understandably, many UK businesses will be worried by this outlook. The pound, by contrast, is currently trading at firmer levels than yesterday. Despite the legal predicament of the UK economy, investors are taking the view that a hard Brexit is unlikely and that last night’s Commons vote has not significantly altered that risk.”

“Going forward the confidence of GBP bulls is likely to be sapped if there is little near-term progress in finding a Brexit compromise and if there is no effort to push back the exit date on March 29. Confirmation that the Brexit start date is set to be delayed would send a strong signal that parliament is not prepared to send the UK over the cliff edge without a deal being first in place. This could be sufficient to create a sizeable GBP rally. That said, a delay would also imply that uncertainty about the shape of the Withdrawal Bill is likely to extend for longer.”

“Additionally, the fact that talks about the UK’s EU future relationship are set to extend for another two years after the start of Brexit suggest that the pound has a long way to go before it finally shakes off the mantle of political uncertainty. In the near-term, EUR/GBP has the potentially to pull back to the 0.87 area, and potentially below, if it is confirmed that May will seek a cross party compromise and push back the start date for Brexit. PM Question Time at noon GMT today and the subsequent parliamentary debate triggered by Corbyn’s no confidence motion will be keenly watched by UK markets.”

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