British pound: decision time is coming

British pound: decision time is coming

The key question about Brexit now is whether there will be a deal between Britain and the European Union or the parties end up without one.

The British parliament is scheduled to vote on Theresa May’s Brexit plan on December 11. As this date approaches, the future remains uncertain. Most experts expect the parliament to reject the current plan. May needs a majority in parliament but, according to Chief Whip Julian Smith, she lacks about 200 votes on her side. Members of May’s Conservative Party urged her to delay the parliamentary vote for fear that she loses it.

No one really has a good understanding of what will happen after the vote. Let’s try to model scenarios and their impact on the GBP.

  • Theresa May delays the parliamentary vote on the Brexit deal. This will prolong the uncertainty. GBP will continue trading sideways with considerable swings.
  • Theresa May wins the vote. The GBP starts an uptrend.
  • Theresa May loses the vote:

a). The Prime Minister may try to return to the parliament with a revised deal. She can offer lawmakers a bigger say over the most contentious clauses in the text, the one on the Irish border. May’s current ally, the Democratic Unionist Party (DUP) of Northern Ireland, will likely be against this. If the amendment is rejected, there will be a negative impact on the GBP. If the amendment is passed, the GBP will rise.

b). The EU will meet on Thursday and Friday and Theresa May can try to negotiate other concessions, although it’s hard to believe that it’s possible to achieve much. The GBP will still have a negative bias.

c). There’s another attempt to make Theresa May step down and even to call a general election. It will lead to political chaos and negative pressure on the GBP.

d). Some members of the British parliament propose the second Brexit referendum. The GBP will jump up. Traders have already started talking about this possibility and it keeps the GBP from falling further. However, the scenario looks hard to bring to life.

During the past week, the GBP traded with volatility but finished close to the levels at which trading started. Trading will clearly become even more unpredictable in the upcoming days, but moves to a no-deal Brexit will pull the GBP down. JP Morgan analysts have recently increased the estimate of no-deal outcome from 20% to 40%. Time is running out and it works against the pound. Watch the key technical levels of GBP/USD for further direction (resistance at 1.30 and support at 1.25). GBP/JPY and GBP/CHF may provide trade ideas as well. 

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