As traders wait (seemingly patiently) for the key “meaningful vote” in Parliament on the Withdrawal Agreement it might be an idea to look at a few scenarios that could play out for sterling. Although sterling has been relatively settled in recent days, perhaps even strong, it could be a case of “buy on rumour, sell on fact” on the initial reaction, but would the sell-off then last? It could be a bumpy road from 1900GMT tonight (when the vote could first take place, although the number of amendments are likely to see this pushed back by several minutes).
A loss is almost entirely nailed on (with the DUP saying that they will certainly vote against the deal), so it is all about the size of the loss. To win, the Government needs 318 votes, but any defeat of less than 50 votes would be considered as a workable loss for Mrs May where she could probably go back to Brussels and extract further concessions that would make the deal palatable for a victory in a second round. However, Sky News has totted the numbers and they do not look promising.
A huge loss (anything over 150 votes) looks likely, but would smash the deal out of the water. However, the actual size of the defeat may not be as bad as Sky are suggesting, as when push comes to shove, some of the harder Brexiteers on the Conservative Party benches may have a change of heart (I am saying a defeat of 150) and not vote against the Government.However, even then, this would still open all sorts of possible scenarios:
- A Labour vote of confidence in the Government which could lead to a potential General Election (requiring an extension to Article 50).
- A shift of stance from Mrs May when she updates the House within three days, with a plan B for a move to a far softer form of Brexit (Norway style EEA, which would also require an extension to Article 50 in order to renegotiate).
- Complete political paralysis as Parliament takes over the process but also leading to an eventual extension of Article 50 as there is no majority in Parliament for a no deal Brexit.
- An eventual forced second referendum as all other avenues prove to be unsuccessful (again needing an extension to Article 50).
- No deal Brexit – as the UK drops out on a technicality amid no agreement in Parliament.
It is interesting that the majority of these pathways involve an extension to Article 50. This is why sterling has rallied in recent days.
Therefore it is likely that once the initial knee-jerk reaction to Mrs May losing the vote tonight, sterling could begin to recover. Sterling should fall initially on the announcement of the result. However, as the majority of scenarios result in either a softer form of Brexit, or extension of Article 50, it is likely that sterling will then recover in the coming days (on the assumption that the Government does not lose a vote of confidence).
Volatility remains elevated, but it is interesting to see 3 month Cable options volatility not as high as in December, perhaps reflecting the path towards either softer Brexit, or extending Article 50.
Despite this, volatility is still likely to be elevated tonight. Looking at Euro/Sterling, the biggest daily range of the past 12 months came in November when Cabinet resignations started to come through on Mrs May’s deal. This daily range was 195 pips. We can expect that tonight’s vote will drive volatility as significant or even bigger. Even on Friday on the news article of a potential delay to leaving on 29th March (due to a technicality of legislation), there was 140 pips daily range. Currently the daily range is just 45 pips. Say perhaps, 200 pips back from today’s current high would be £0.9075 so a realistic test of £0.9100 could easily be seen in response. However, this initial sell-off on sterling could prove to be short lived as traders quickly move to price for these softer forms of Brexit.
For Cable, the volatile move in November was a daily range of 300 pips. So this is a decent ballpark for the initial move lower. That would mean a move back from today’s high of $1.2915 back towards $1.2600. The key lows of December were around $1.2475. Once more it would be reasonable to expect that sterling could then begin to form a recovery.