Brexit Monitor: The Waiting Game – Brexit Edition

Fundamental analysis of Forex market

As widely expected, PM Theresa May’s Brexit deal failed in the House of Commons. The defeat, however, was bigger than expected, 432 against versus 202 in favour.

The first thing to look out for is the Labour’s motion of no confidence in May’s government tomorrow. As all wings of the Conservative Party including the hard Brexiteers and May’s supporting party DUP from Northern Ireland have said they will vote for confidence in the government, PM Theresa will most likely survive the vote (remember the Conservatives cannot force her to resign as party leader for another year after she won the party confidence vote in December). Vote takes place at 20:00 CET.

The second thing to look out for is PM Theresa May’s discussion with party leaders and other leading politicians on how to proceed with the negotiations. May is right when she says that while the House of Commons has clearly indicated it is against her deal, the Commons has not said what it wants. Right now there is no credible alternative to Theresa May’s Brexit plan, which is why we think we are in uncharted territory (more on that below). After the discussions she will go back to the EU to discuss, however the EU restated tonight that the Withdrawal Agreement is not open for renegotiations (but it could hardly say otherwise at this point when things in the UK have not settled).

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The third thing is that PM Theresa May will put forward her Brexit plan B for the House of Commons on Monday 21 January (which is amendable). Uncertain what that motion would include given the limited time frame.

As we outlined in our preview, we still think some outcomes are more likely than others despite us being in uncharted territory (see game tree on page 2). The likelihood of an extension of Article 50 has probably increased, so that is also something we arei set to monitor (officially May still sticks to the plan of leaving the EU on 29 March). A majority in the House of Commons has clearly indicated it is against a no deal Brexit, which would only happen by accident, as it is the default option (15% probability). We continue to believe the probabilities of a soft Norway-style Brexit and snap election are low (10% and 5%, respectively).

The two most likely outcomes are: either May’s deal (or something very similar) passing at a later stage as pressure builds on the politicians or a second EU referendum (40% and 30%, respectively) but British politics need to settle before we find out which way the UK will go.

EUR/GBP declined despite the loss being bigger than expected. As such, price actions resemble a ‘buy the rumour sell the fact’ and thus GBP short covering in the aftermath of the voting. As we are now in unchartered territory, the next days of debate in the parliament and not least the no confidence vote tomorrow will be directional for GBP. We expect EUR/GBP to stay in the 0.88-0.9060 range until further Brexit clarification. As such, an extension of the Article 50 would be positive for GBP as it reduces the risk of a no-deal Brexit, while pressure on the GBP might increase due to rising uncertainty as the 29 March moves closer.

For more details on our Brexit scenarios and GBP forecasts please see Brexit Monitor – May is losing control over the Brexit process but no credible alternative has emerged yet.

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