A Brexit 3D illustration with the U.K. sailing away but constrained by chains linked to Northern Ireland and European Union (EU) single market. (Photocredit: Getty).
Getty
Amid more turmoil for the beleaguered British Prime Minister Theresa May, who perhaps has only days or weeks from her tenure ending, tonight saw the unusual process taking place in the U.K. Parliament, with the use of a so-called “indicative votes” method. But how many more votes frankly can the British public stomach?
Mind you they have probably switched off given all the delays over Brexit. It’s gone beyond a joke and making the institution a laughing stock across Europe and the rest of the world. And this, in the claimed birthplace of democracy. You could say the Brexit handbook on delay has been in full force.
Indicative votes is a method last used back in 2003 in a bid to reform the House of Lords (the upper house), which derived no clear consensus. The hope was this time around it might yield a workable path. Well, there have been enough attempts surely.
I guess we have to have some sympathy with Prime Minister May as there are some 650 MPs in the House of Commons, and getting agreement from the majority of MPs – with differing and diverging views over Brexit – was never going to be easy. It’s simply the nature of the beast, if you like.
The outcome, which was expected at 9.00pm GMT, is not binding on the government, but the PM is looking for a majority to push through a workable plan. The default option of leaving the EU without an agreement in place remains, albeit a few weeks later than the original Brexit date of this Friday, 29 March 2019.
And, whoever thought that leaving the EU was ever going to be a stroll in the park? It’s complex – period. Well, it wasn’t likely either that the EU were going to make it easy.
So going into the indicative votes tonight, what could be expected in terms of its outcome the impact on Sterling? Earlier today it was not entirely clear how many options would be on the ballot paper. But it was known that the vote will take place from 19:00 GMT with results likely to surface around 21:00 GMT.
It in fact turned out that there was voting on no less than eight Brexit options. But in terms of Meaningful Vote 3 (Mv3) it should be noted that the deal has not fundamentally changed.
The British pound has been up by as much as 7% year to date against the U.S. dollar (low 1.2434/high 1.3381) on optimism that a “No Deal” has become increasingly unlikely. So, perhaps we should at least acknowledge Mrs May holding things slightly steady on that front, despite all the calls for her to resign.
Cable Rate: Sterling vs U.S. Dollar
Michael Baker, an analyst at brokerage ETX Capital in The City, commenting earlier today said: “Sterling traders are looking for tonight’s vote in Parlaiment to yield a workable consensus. Overcoming the March highs will likely see the pound trade up to levels not seen since June 2018. However, we are still 12% away from the levels we saw the night before the 2016 general election at around the $1.5000 mark.”
For sterling, there was precious little to drive directional trading earlier today. The GBP/USD currency pair had seemed to be finding support around the $1.3180 region, roughly in line with the 50% retracement of the 2016-2018 trough-to-peak rally.
“The pair [GBP/USD] remains in an uptrend but the emergence of the rising wedge looks ominous. Bulls require a break above the March high of $1.3380, while bears will be focused on the 1.30 level and the 200-day line nearby. Uncertainty is the only certainty right now – expect more volatility in sterling crosses ahead,” noted Neil Wilson, Markets.com’s chief analyst in London.
The foreign exchange rate between the British pound and the U.S. dollar – also known as Cable – year to date. (Source: ETX Capital).
ETX Capital
Scottish analyst Wilson added earlier in the day prior to the voting began: “Time is running out though and without parliament coalescing around a majority view, the default is still No Deal.”
So what are the most likely options with subsequent predictions for the British pound? Here below we run through a few scenarios – from Customs Union to revoking Article 50.
Customs Union
The Customs Union is a mechanism that allows EU members to operate as a single trade bloc, imposing common external tariffs and negotiating as one signal whole entity.
Under May’s deal, Britain would leave this arrangement as the country would in a No-Deal scenario. Options on the ballot paper tonight had been thought likely include staying within this framework. Labour’s alternative five-point Brexit plan has stated that continuous membership of the customs union, and similar options have been put forward by Labour’s Hilary Benn.
On this, ETX Capital’s Baker said: “The pound is likely to react positively to this as this provides certainty to ongoing trade relations.”
Re-Opening Withdrawal Agreement
Although completely ruled out by the EU, there are proposed options to revisit the withdrawal agreement and pursuing a different route. The
“The Malthouse compromise plan proposed by arch Brexiteer Jacob Rees-Mogg and an amendment to propose a unilateral right of exit from the backstop (both very similar motions), if successful, will likely require a long extension to Article 50,” remarked Baker.
He added though: “There’s no guarantee an extension will be given, with the pound likely to stagnate or fall due to the uncertainty remaining.”
EFTA & EEA
The European Free Trade Association (EFTA), a collective of four member states – Iceland, Liechtenstein, Norway and Switzerland – that promotes free trade, whilst the European Economic Area (EEA) provides a single market that enables free movement of labour, goods, services, and capital for all EU member states plus Iceland, Liechtenstein and Norway.
Switzerland is not part of the EEA, but holds a substantial amount of bilateral agreements that allows it to operate within the single market.
Both these models do not cover fisheries and common agriculture, nor do they cover a customs union or common trade policy.
“It is not clear whether the U.K. will seek to join and look to change the terms, a move in this direction is a seismic shift from the current path. Original members of EFTA would need to approve any new members,” posited Baker.
Moreover, the ETX Capital analysts remarked: “With the close cooperation with the EU that comes from being part of this group, it’s likely to benefit the pound.”
A People’s Vote
The Kyle and Wilson option puts the vote back to the public. Any deal agreed should be verified by the electorate, including the option of overturning the original 2016 vote. But if that happened one could expect the people who voted for Brexit to be taking to the streets.
“The pound would favour this as based on the carnage that has ensued in recent times,” Baker said. “The [British] public may feel the only option is to go back on the original referendum. Not enough support from the big parties and any optimism should be carefully watched as the market has not been at its best when predicting votes.”
Revoking Article 50
This option of revoking Article involves removing the default no-deal as currently enshrined in law with revoking Article 50. So, if MPs are unable to agree then the U.K. will remain a full member of the EU.
“This will be a positive for the pound, but the fallout from not delivering a referendum result will likely limit the long-term gains,” ventured Baker at ETX Capital.
But, as Wilson at Markets.com pointed out, however it all turns out will any these votes actually matter? Jury out on that.