With most MPs against the idea of a no-deal, it is a growing possibility that the UK may extend Brexit date past 29th March. Sterling will rise if extension is made, short EUR/GBP?
Early this morning, the world witnessed the result of two years of tortuous negotiations between the UK and EU. It ended with House of Commons rejecting Prime Minister May’s withdrawal agreement by 432 votes to 202, effectively rejecting the deal. This is the heaviest defeat for a sitting government in history.
However, why did the sterling rise instead of moving lower?
The market had already predicted May’s loss and the scale of the defeat was no surprise. What held sterling steady and cause its decline to fizzle was that the market is convinced that a no-deal Brexit is very unlikely as the House of Commons displayed huge animosity to such an outcome.
After suffering such a huge defeat, May’s plan has no chance of being resuscitated. Labour Party leader Jeremy Corbyn has since tabled a no-confidence motion and said the defeat of the deal had been “absolutely decisive.” May, on the other hand, is expected to win the confidence vote which is held later tonight as neither the Conservatives nor the Democratic Unionists (the Northern Irish party that supports the prime minister in big votes), wants a general election.
What is next then after the astounding defeat?
May has until Monday to plan how she wants to proceed. She announced immediate talks with senior MPs from all parties to identify “genuinely negotiable” changes to the deal. Given the scale of the defeat, it may seem like May will have no choice but to either delay Brexit by invoking Article 50 past the 29th March deadline or declare defeat and let the UK exit without a deal. The latter seems less probable as May has declared that she would deliver on the public vote to leave the EU: “It’s my duty to deliver on their instruction and I intend to do so.”
If May indeed invokes Article 50 and requests for an extension, that is good news to the market which could mean sterling could continue to move higher. However, if the UK were to exit without a deal, that will be a dovish sign and sterling could dive sharply. GBP/USD could head higher ahead of the no-confidence vote tonight as the market expects her to win.
